ICE Fixed Income Monthly Report
In this edition, Amanda Hindlian our President of Fixed Income & Data Services shares her view on the impact of the rising interest rates on the U.S housing market. We examine the benefits of Best Ex and Transaction Cost Analysis and how they offer a way to help gain an edge.
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World leaders gathered last week in Davos and we listened closely to what they had to say. Unsurprisingly, the debate largely centered around when, how long, and how severely the U.S. could expect to be in a recessionary environment as the Federal Reserve battles inflation. Wrapped within the same dialogue was discussion of diverging national economics and the important knock-on effects on foreign exchange, along with top-of-mind issues like climate change and geopolitical dynamics. At the same time, we saw a continued tampering in the U.S. inflation print and data, suggesting that the labor market remains tight, all while employers continued to announce workforce reductions that are not yet reflected in the figures.
Given the nearly-immediate impact of interest rates on mortgage borrowing rates, we continue to look to the housing market to assess how rising interest rates are impacting this vital part of the U.S. economy, and the implications on consumer demand. The normal chain of logic follows: as interest rates increase, so too do mortgage rates, making borrowing more expensive. As a result, home buying activity is expected to decline and home prices drop, which causes a decline in consumer wealth that leads to a reduction in consumer demand. Of course, any number of factors can disrupt this chain of logic — hence our focus on the data.
One area we look to for evidence of housing market health is the second home and investment property segment. These loans are typically deemed more speculative than traditional owner-occupied loans. Interestingly, ICE Mortgage Technology® data shows clear moderation in loan application activity in states that have been “hot spots” for second homes and investment properties — think Florida, Nevada, Arizona and South Carolina.
Reviewing trends from the past few years provides further context: mortgage applications for second homes and investment properties, relative to owner-occupied properties, were somewhat muted in 2020 as the pandemic fed uncertainty. Swift rate cuts and Fed support for bond markets saw confidence rebound, with cheap money helping fuel a housing frenzy in 2021. As inflation concerns rose, the Fed kicked-off aggressive monetary policy tightening. ICE Mortgage Technology data showed a resulting change in behavior in hot-spot states on both the demand and supply side. On the demand side, investor and second home activity began to drop in 2022 as the cost of borrowing jumped, while on the supply side, underwriting for investor and second home loans in these hot-spot states has become more conservative of late, with both Loan to Value (LTV) and Debt to Income (DTI) dropping from their peaks.
Taken together, this picture seems to suggest that the Fed’s approach is working — so much so that the market has begun to temper its rate hike expectations. Mortgage rates, as measured by the ICE U.S. Residential Mortgage Rate Lock Index, have declined. As of mid-January, the ICE U.S. Conforming 30-Year Fixed Mortgage Rate Lock Index sat just north of 6%, down a full percentage point from peak levels hit in November 2022. So, while things could get worse before they get better, there are also some brighter signs ahead.
2nd Home and Investment Mortgage Applications
Source: ICE Mortgage Technology
ICE U.S. Conforming 30-Year Fixed Mortgage Rate Lock Index
Loan Balance Weighted Average Rate
Source: ICE Data Services
Elsewhere in bond markets
Transaction analysis: an anchor in volatile markets
As uncertainty stalks markets and remote work proliferates, the ability to find liquidity and measuring trade performance is critical. Fixed income desks around the world, who apply the analytics of ‘Best Ex’ and Transaction Cost Analysis can refine their trade process to gain insight on costs, asset allocation, and assess counterparty execution performance. It’s a dynamic that underscores a recent shift: where the use of best trade execution tools once focused on fiduciary duty to clients, now, they offer a way to help gain an edge.
High Frequency Trading: direct market access for traders across Asia
A swift acceleration in high frequency trading across Asia is driving demand for direct access to data across the region’s markets. And where many prime brokers were once focused on bringing U.S. markets to Hong Kong’s algorithmic trading community now, it’s “all about China”. It’s a dynamic that will see new arbitrage opportunities for traders, with infrastructure required to support their needs. In response, ICE has stepped up its investment into North Asia with a multi-million-dollar expansion to a financial network that connects the world’s largest institutions. The investment in ICE Global Network will add capacity for clients in Shanghai, Hong Kong and Tokyo as one of Asia’s only full-service providers - from hosting and managed services to connectivity and market data.
Attending Exchange ETFs in Miami?
We’ll be at this year’s Exchange ETFs conference. On February 6, please join us at our poolside cabana #1 for networking, refreshments, and light fare. If you’d like to arrange a meeting in advance or would like to know more about our presence at the event, please get in touch.
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