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Columns

September 2024

Fixed Income Monthly Report

Chris Edmonds
Chris Edmonds
President, Fixed Income & Data Services
ICE

A tipping point for market fragility

We face a potential tipping point for market fragility: an expected pivot in monetary policy, a possible correction for market-dominant tech stocks, and a U.S. Presidential election – all against a backdrop of geopolitical tensions.

Perhaps the most consequential factor for market volatility is the expected September rate cut – the first since March 2022. Recent commentary from policy makers at the Federal Reserve suggests rates will be cut in the near future, ending an aggressive tightening cycle that began in 2022 to combat hot inflation. Futures markets have priced in roughly a full percentage point cut by year end and any deviation to this path -- say, weak jobs data indicating a need for deeper cuts -- could trigger volatility.

For housing markets, this dynamic has several impacts. New buyers will welcome cheaper financing: for a 30-year fixed loan, ICE futures linked to the ICE U.S. Conforming 30-Year Fixed Mortgage Rate Lock Index are pricing in a 6.42% rate by mid-September, 6.30% by mid-November and 6.22% by December. Given the trend, borrowers who can delay their purchase may be tempted to await lower rates, which would prolong sluggish turnover. Still, ICE’s data paints a picture of market health: rising home prices have lifted tappable equity to a record high, while during August, mortgage interest rate declines brought home affordability to its best point in six months.

Rate cuts have other implications; while many borrowers are tied to sub 3% mortgages from the cheap credit era, successive cuts will likely trigger a wave of refinancing for recent, high-interest rate mortgage loans. For MBS investors, rate cuts would prompt prepayments that will need to seek reinvestment at lower coupons, ending a period of relatively predictable cashflows and spelling a ‘perfect storm’ for the sector.

Away from housing, recent spikes in key bond and equity volatility indicators show just how sensitive the backdrop is. The ICE BoFA MOVE Index, an indicator of bond market volatility, recently hit its highest level in August since late 2023 amid a lackluster earnings season for many bellwether tech stocks. The equivalent equity gauge also notched its highest reading since the early days of the pandemic. While both indicators have since moderated, they underscore broader questions around the earnings outlook and valuations.

Finally, the U.S. election. This time, additional uncertainties center on the personalities involved. Here, BlackRock’s Chief Investment Officer of Global Fixed Income Rick Rieder captured the dilemma well in a recent conversation we had: how do investors position for candidates who are so disparate in their views? Whatever the outcome, some turbulence seems likely.

Supporting better outcomes for small bond trades

Historically, the fixed income market has been the domain of institutional players, trading large blocks of bonds with scant transparency. The rise of electronic trading and availability of sophisticated data has underpinned a transition from this market structure. In this whitepaper, ICE’s Tim Monahan and Tom Ficarra explain how ICE’s proprietary technology and liquidity help to advance U.S. municipal trading.

Why it’s a perfect storm for mortgage-backed securities

Market gyrations associated with a presidential election, along with anticipated Fed rate cuts, mean the next few months could prove challenging for mortgage-backed securities (MBS). What could these dynamics mean for pre-payment risk, and which metrics should investors be watching?

A conversation with Rick Rieder, CIO of Global Fixed Income at BlackRock

BlackRock’s Chief Investment Officer of Global Fixed Income Rick Rieder strives to maintain attractive investment returns in a slowing economy and during a volatile election year. What themes will reshape the coming five years? Which market trends is he watching? And does the classic 60/40 asset allocation still hold?

Indices for residential mortgage-backed securities Down Under

ICE has launched a suite of indices for the Australian residential mortgage-backed securities market. These indices are accessible in ICE’s Custom Index Tool, which provides a variety of ways to prototype and back-test strategies for multiple use cases.

Delivering opportunity through data access

Watch our latest video narrated by ICE's President of Fixed Income & Data Services, Chris Edmonds, to learn why access to data can provide an edge in fast-moving markets. Whether fixed income, derivatives, or mortgages, ICE delivers quality data and analytics across asset classes. ICE also offers specialization in pricing complex asset classes. It’s all about helping clients manage risk and spot opportunity.

This material contains information that is confidential and the proprietary property and/or a trade secret of Intercontinental Exchange, Inc. and/or its affiliates (the “ICE Group”), is not to be published, reproduced, copied, modified, disclosed or used in any way without the express written consent of the ICE Group. This document is provided for informational purposes only. The information contained herein is subject to change and does not constitute any form of warranty, representation, or undertaking. Nothing herein should in any way be deemed to alter the legal rights and obligations contained in agreements between the ICE Group and its respective clients relating to any of the products or services described herein. Nothing herein is intended to constitute legal, tax, accounting, or other professional advice.

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