Ruble Recovers, Yield Curve Inversion, 45-Year High Appreciation

After tanking 40% to 139 rubles to the dollar, the ruble has recovered to pre-invasion prices and was the world’s to performing currency in March. The sanctions imposed on Russia targeted their ability to acquire foreign currency – dollars and euros for the most part. However, many European companies continued to purchase oil and gas (who’s prices are up significantly) from Russia who also has strong trading relations with China and India so Russia ended up having a strong influx of foreign currency. Even though their $640B of foreign currency holdings was frozen, Russia was allowed to access it to make payment on their sovereign debt so they didn’t need to sell rubles. Russia also increased interest rates to 20% and required Russian businesses to swap 80% of money made overseas to rubles.

Rates – increased again this week as the price of Mortgage Backed Securities (MBS) continued to ride their downward escalator. Rates are being squeezed by inflation and the Fed balance sheet reduction. Mortgage rates are up approximately 1.75% from this time last year. The 10 Year Treasury hit a 3 year high at 2.7%

Home Values – Core Logic released their home price index showing a whopping 2.2% increase in February and 20% year over year growth (a 45 year high). This time last year Core Logic predicted 3.2% annual gain. Now they are anticipating 5% over the next 12 months.

Yield Curve Inversion – the 10 Year and the 2 Year briefly inverted in the last week. This means that the return on the 2 Year Treasury Note paid more than the return on the 10 Year (so why buy the 10 year). Historically yield curve inversions have indicated a recession. After the last 5 inversions it took an average of 11 months until the recession arrived. If you remove the 1998 recession it is closer to 5-6 months.

Real Estate Values During Recession – remember that Real Estate is a good hedge against inflation. In the previous 9 recessions home values improved or stayed flat during 8 of them.

The Fed – released their minutes from the March 16th meeting. These showed they would have hiked their rate 50bps (instead of 25) if it weren’t for the Russia/Ukraine conflict. It is likely we will see a 50bps during a future meeting (as early as May) in response to burgeoning inflation. The Fed also announced their balance sheet reduction of both treasuries and MBS, which will be at a more rapid pace than the last time they reduced.

Mortgage Applications to purchase homes decreased by 3% and are down 9% year over year. Refinances fell by 10% last week and are down 62% year over year. Refinances now make up less than 40% of transactions.

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