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Alex Steel, Paul Sweeny. Here we do have some breaking news from the Supreme Court. The Supreme Court upholds US gun ban in domestic violence cases. Whether to strike down this federal gunban for people subject to domestic violence restraining orders was the point in question. Let's go right now to June Grasso, who covers everything law and legal for us for Bloomberg Television and Radio.
June, can you walk us through this? Yeah?
Sure.
So this is a case where a man who was subject to a domestic violence order wanted to get a gun, and there is a federal ban on that. But the Fifth Circuit, which has been pushing the law farther to the right than even the Supreme Court likes, said that's unconstitutional. And during the oral arguments this is not so much of a surprise because during the oral arguments a majority of the justices seemed to think that it was this kind of restraint on owning a gun is logical.
I mean, this is the guy.
The case was really bad for the gun lobby because the guy had gun out into public and shot the gun off and there was this restraining order. So what they're saying is, in this case, you can stop someone from having a gun. Gun restrictions have been up in the air for years since the Bruin case, the New York case where the Supreme Court sort of toppled the way the courts analyzed gun restrictions and they base it on historical So you'll see gun cases where they're talking about, well,
was there something like this in the eighteen hundred? You know, it's it's sort of a crazy way for me, it's a crazy way to do it.
Does this open path for common sense gun legislation then, because you one could argue this seems like pretty good common sense. I would want someone who's convicted of domestic violence thing having a gun. So if that's okay, can't we also say someone who has I don't know, criminal rumstock.
Maybe yes, I see, that's what I mean.
I don't think I don't think it translates with this court. I think this is sort of an exceptional situation because we had that bump stock decision where they said where they said, even though it operates like a machine gun, the way it functions, you know, they use the term function and they use the dictionary to analyze what function meant.
Justice comments, So.
You know, it would be nice to think that that was the way that we have common sense gun regulations, but I'm not sure that that's what this stands for.
I mean, at the end of the day, it says that right the Second Amendment isn't so broad that it protects the gun rights of those found to be dangerous. So now are we going to get into his situation where we have to define dangerous and like what what constitutes a human being dangerous?
Is that what is going to come up now?
I mean, I have I really have no idea how this is going to play out, because you know, it's this it's a it's one case. It's a case where the Fifth Circuit went out on a limb, and there are set there are like more than ten cases. I think this term where the Fifth Circuit went on a limb and the Supreme Court almost has to take the case, even if they don't want to take the case because otherwise you have this you know, sort of abnormal law in place, so it's hard to say what the what
the effect will be. I'm sure that that you know, in other gun restriction cases, they'll use this to try to show that there are, you know, there are ways to get around it. I'll have to read the decision to see to see exactly, you know, how it came down, and it's by the Chief Justice. So that's a sign that it's not going to be one of those you know, radical, hard to understand decisions by Clarence Thomas, or it's going to be sort of down as down the middle as you can get so because he writes.
Sort of reasoned opinions.
So I think that and I think that, you know, this is one that we expected, but still a big case.
It's eight to one.
I noticed Justice Thomas dissenting. There is not a gun law that Justice Thomas wants to see. No, really, he is consistently he's the one who wrote that opinion. As I mentioned on the Second Amendment that broadened the Second Amendment to you know, being able to carry handguns and the restrictions that New York put into place, throwing them out so I mean, he just there's just not a gun law that he will ever say, is all right.
We should note that Michael Bloomberg, the founder and majority owner of Bloomberg LP, the parent company oft Bloomberg Radio, is a donor to groups that support gun control, including Every Town for Gun Safety. So, again, as you mentioned June eight to one ruling, does that surprise.
You not really?
I mean, the surprise that Thomas didn't he the surprise is that even in this situation where you have a guy with a domestic violence restraining order threatening people, even then he said that, you know, he doesn't want it restriction.
That's the only surprise.
Otherwise, from the oral arguments, it seemed pretty clear that there were a majority of the justices that were going to, you know, allow this particular ban.
And we've been talking to June Grasso right now about the Supreme Court upholding the US gun ban on domestic violent cases. It's an eight one ruling, as Paul was just mentioning, the Justice is saying the constitutional Second Amendment isn't so broad that it protects the gun rights of those found to be dangerous. Just as Clarence Thomas was the lone dissenter. Okay, Jun, what do we learn anything else today from the Supreme Court? They're like time five days in taking.
When we were talking before, I said, there are nineteen cases and basically fourteen of them are the controversial, and so today they came out with five decisions, four of which were not controversial at all that we're really not tracking.
I mean, some of them are interesting.
One was about whether a US citizen has a constitutional right to have her spouse.
You know, declared a citizen.
So that that's an interesting case, particularly in light of what Joe Biden did this week relating to allowing spouses who are married to US citizens who came to this country illegally to stay in the country while they go through the process. Normally they'd have to go back to their home country, which is really risky. So it's interesting. But still, so we have one week left so far, one decision day on Wednesday. I'm sure they'll have more coming up, they'll set more, but so we have all
the cases left. Presidential immunity, the January obstruction charges, the Idaho abortion ban, the homelessness issue, Chevron case, which you mentioned before, the case is on social media, the case on Purdue Pharma air Pollution sec.
Why are they waiting? Do you think is typical?
All right, so it is typical. But so talking to a professor yesterday, because I was questioning why they're all and I always feel like they're waiting until the end and they get them all out at once, and it gets lost in the ether. You can't cover everything at once. But what people say is that, well, the more complicated cases with like six to three, they'll be dissents, there'll be concurrences, and then they have to pass those around the justices and so it takes longer.
But this professor I was talking to, Harold.
Krantz, said, you know, he thinks that the chief is holding them. And because if you notice yesterday there were four cases, three of them were about criminal procedure, they were grouped together. So's it's odd to me that this is just haphazard random they all come out. And the Raheemi case, the case that we had heard today, was one of the oldest cases. It was heard in November, and usually you can tell how the cases come by when they're heard.
So think about the Trump case. It took about.
Twenty days on the less Trump case.
Having to do with the ballot.
We're up to like forty something now on the Trump case, it's so it's it's.
A we'll be stretched next week.
Okay, oh we'll be here, we'll be here. Well, you're off Friday, off Friday.
Oh, that's going to be a big day.
Maybe you don't want to take prep now, I got a double prep now, all right, Dune, thanks a lot, June Grass joining us to help break it down. Just to reiterate the Supreme Court upholds the US gun ban and domestic violence cases. I should point out Smith and Western shares are sliding over twelve percent, but that's also because they said sales in the first quarter would be ten percent lower a year on year than originally thought.
So if you're just looking at the market for that kind of reaction, all right, let's get more on this with Andrew Willinger. He's executive director Duke Center for Firearms Law. Andrew, thank you for joining us. We appreciate it. Can we get your reaction to this ruling?
Absolutely?
Yeah, So I think you know the big takeaway, of course, is that the court here upholds a federal law that restricts people who are under domestic violence restraining orders from possessing firearms. It's an eight to one decision, so you have eight justices in favor of that outcome. Justice Thomas is the sole the center. And I think, you know, what we were watching for, at least what I was watching for with this case is sort of how broad
the decision would be. And the Court seems to settle on something akin to a dangerousness principle, where they, you know, the majority basically says that when there's some evidence that a person poses a threat of harm to another person, then that individual can be barred from possessing guns, consistent with history.
Andrew, is there any reason for any gun protection advocates to maybe read into this that, hey, this may create an opening for you know, more common sense gun legislation.
So I think, having just had a chance to briefly skim the decision, my read is that it's somewhat narrow and that the court doesn't squarely confront you know, even other related issues like banning convicted felons from possessing guns, for example, you know, those convicted of non violent felonies, and and sort of leaves those for another day. I'll have to dig a little bit more into the various opinions, because there are some concurrences as well that might shed
light on where some of the specific justices are. Well, I.
Think it just raises the question, then then what is dangerous? So if you can't sell a firearm to someone who's dangerous, how are we going to be interpreting that through legislation and then through the courts?
Yeah, and my my initial reaction to the decision is that again the court, the majority, sort of leaves that question a little bit open. You know, there was some discussion at the oral argument that this specific law doesn't really pose a difficult case because there has to be a finding by a state court judge that somebody is dangerous is likely to commit domestic violence. So, in other words, this would sort of be a case in the heartland of that principle.
But there might be edge cases.
With regard to other types of gun regulation that the court will have to confront. And one takeaway I think one initial takeaway from this decision is it wouldn't surprise me if in the coming terms, the court did confront some of those issues and decide those questions.
Andrew, what is the Duke Center for Firearms Law?
Yeah?
Absolutely, The Duke Center for Firearms Law is an academic organization that how is that the law school here at Duke, and we seek to grow and build the scholarly field of firearms law in the legal academy. We also have a variety of resources on a Second Amendment cases and other issues related to gun regulation that we host through our website, blog, and database of historical gun laws for example.
Go ahead, Andrew, I just with that background, and given what I know is you know, the majority of US citizen's favorite common sense gun law. I think that's a fact. What's from your perspective at the Duke Center for Firearms Law? Why can't more legislation common sense gun laws? Why can't they be enacted here in this country?
Yeah?
So, I mean, I think one one obstacle to to some of these laws has been the tests, the legal tests that the Supreme Court set for two years ago, almost to the day in a case called Bruin, which essentially says that the way courts are to evaluate Second Amendment challenges is by determining whether a law is consistent
with historical tradition. And that you know that this case, this decision today is the first, the first we've heard from the Supreme Court since then on the Second Amendment, so their first sort of chance to clarify what that test should look like, and you have today a justice is saying pretty clearly that, you know, we're not requiring a twin, We're not requiring any kind of exact replica in the historical record to support a modern gun law.
So I think that's important and consequential, and maybe maybe to some extent, the justices in the majority are are concerned that their their prior decision was interpreted by that way by at least some lower court judges.
How do you how do you think gun laws or the reaction to them evolve as it continues to seem more politicized. And I know that's even crazier to say, because it was already so politicized, but so many more of the issues are now politicized. How do you think this evolves in this country?
Yeah?
Absolutely, you know, again to take it back to the to the Raheemi decision, I actually think this, this is uh, this sort of illustrates maybe less of an ideological or political divide as to certain types of gun laws. You know, this is this is UH made maybe a law that has you know, we know it has very broad public support based on polling that that restrictions on domestic violence offenders. Most the vast majority of people in the country support
those types of laws. And so today we have a decision upholding that that regular at the federal level.
And so, you know, I think there will certainly be.
Other cases down the road that will be more of a stark, you.
Know, ideological divide.
If you think about something like a restriction on semi automatic rifles, so called assault weapons, that would be an example where I would expect the court to really fracture along ideological lines.
But that wasn't the case today.
When I was getting my MBA at Duke Alex, I took one class at the Duke Law School. Big mistake, do you run away? The kids work super super hard like I had to work. In that case. My little study group wouldn't let me just skate by. They weren't like the business school. We were just punching our ticket to go back to Wall Street. That's amazing. These kids were like serious. So anyway, appreciate that.
S thanks for that and see you guys later.
Yeah, exactly, all right, Andrew, thank you so much for joining us. Andrew Willinger, He's executive director of the Duke Center for Firearms a lot.
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Okay, So I was mentioning that we have the whole triple witching Vin Signerella Poop poove that, so did Paul Sweeney. We have another thing today, and that is ETF a rebalancing. So here's like the broad Strokes, the State Street Global Advisors Tech. ETF has to rebalance. It has about seventy one billion dollars in that and the idea is that you're going to have to buy some Nvidia and sell Apple and it could kind of move individual stocks around. So we wanted to see if this was actually a
big deal, not like the triple Witching thing. James Seffert is Bloomberg Intelligence ETF research analyst and he joins us, Now, okay, is it a big deal that's rebalancing?
I mean, I think it's a big deal. It showed some of the issues with passive indexing. And there's a lot of things that people like to complain about with passive investing and passive indexing and things like that, and we spend a lot of our time pushing back saying it's not as big of a deal as people are
making it out to be. That said, I like to go back and kind of point out times where sometimes rules can be a little dumb and situations happen, where wonky things happen in the markets, and I think this is one of them. I mean, the after market closed today, our estimates are somewhere around that this XLK ETF is going to have to sell are almost thirteen billion dollars
worth of Apple and buy about eleven billion dollars of Nvidia. So, I mean, that's just wonky in itself, I guess I would say, but I'll stop there.
So, James, how do we get to this position? Doesn't XLK this this ETF? Doesn't it do this stuff every day? Like if in Vidia is going up, don't they buy more in Vidia? I don't know how that works.
Yeah, So say most of these passive industries work is they just hold these stocks in proportion to their market cap, so the size of the company, that's how much they hold. It's actually we can get into the wonky parts of this a little bit too, but it's more about free float market cap, which we can get into in a bit. But essentially, theoretically, as the prices of these the values of these stocks go up, the waiting in the hall
in the fund will go up. But there's things that happen where you have to rebalance, so they rebalance quarterly. Different stocks get moved from different sectors, so they'll come out of the sector ETF. But theoretically, the way XOLK works is it takes all the S and P five hundred stocks that are in the tech sector and should market cap weight them.
But there's these.
Rules from the SEC that have to do with registered investment companies, So all mutual funds ETFs for the most part fall under this registered investment company's ruling, and they
have diversification requirements. The problem is, if you just allowed these things to be market cap weighted, you have the three largest companies in the world in Microsoft, Apple and Nvidia, all around three over three trillion dollars in market cap valuation, and you'd end up with this fund being sixty plus percent just in those three stocks, and the diversification rules and the index rules don't allow that. And the way they do that in this case is they just cap
the smallest one. So if you're over a certain weight five percent ish and if all of those stocks over five percent add up to over fifty percent, you cut the bottom one to four and a half percent in the fund. So essentially that meant for the last six quarters, despite in Video should have had a significant weight, every time it rebalanced, it got sold because it got capped
at four and a half percent. But last Friday, as of the market closed, which is when this fund looks at this on a free float adjusted basis, in Video was larger than Apple, So all of a sudden, now Apple is that smallest stock, so in Video is going to get a bunch of buys and Apple's going to get a bunch of sales. Ironically enough, today, with the way in Video is trading down over four percent, it's actually smaller than Apple. So if the date was today, we wouldn't be having this rebalance.
So okay, I'm still confused it.
So can we attribute any of the price action too of Apple and Nvidia in the past to this.
So it's hard for me to know exactly what's going on. Right, So there was a massive inflow that went into this fund that's in. There's rebalance flows. Money comes in and goes out, and there's It's kind of happens over days as far as the rebouance goes. So when you it's called a reference date, that's the date. We're going to look at all the information from this date and we're going to use that information to do the rebalance. So
in that case, it was last Friday, June fourteenth. The actual rebalance is going to happen today after market close. But the people making markets like, no, this is going to happen, right, It's not like this stuff happened and it closed on Friday last Friday, and then no one's paying attention to this or trading around. What's going to happen with these tens of billions of dollars being traded like things were happening Friday last week and all along
this week they were preparing for these trades. So it's most likely that like Spider and anyone else that's tracking this index has the trade set up and lined up so they can match the underlying index. That's the ultimate goal of these passive funds. They want to track the underlying index. In this case, ex it's the large cap stocks and the S and P five hundred that are in the tech sector.
Have we seen this before? If this feels like I haven't read this scene this dealt with this before? Is this new need?
Yes and no. So there are instances where wonky things like this happen in many cases there with smaller stocks though. So I've written in the past about some dividend funds, and there's there's wonky issues with dividend funds where if you're waiting it by dividend yield rather than market cap, like this fund is weighted, as the price of the
stock goes down, your dividend yield goes up. So basically what happens in some cases with those dividend yield funds or some other funds, some cash flow type funds as like they'll do cash flow yields and things like that. As the price of the stocks go down, it looks like their valuation metrics are getting better, but it's partially because the stock price is going down. So much, and there's often times reasons for that, and then many of these funds have like limitations, so if it goes below
a certain market cap, we can't hold it. So all of a sudden they build up these massive positions and then it gets too small and then they're forced to dump it. And that's happened in the past, but it's rare. This is the first time I've ever seen it happen with a large cap ETF and a spund of this size, a grand seventy one billion dollars, like Alex said at the beginning of this, So yes, it's it's it's rare. So that's why I said, I like to point it
out when it happens, but it doesn't usually happen. And the only reason it's happening is because we have this unique situation where they've taken a bunch of names that used to be in the technology sector and move them out in a like reclassification. So Visa and mastercarda no longer in there, which are big funds. Obviously, Google and Meta and other ones have left, So all of a sudden, you left with this really top heaviness at the top of the tech sector. In these three stocks, and that's
causing a lot of wonky things to happen. Now, the thing I'm watching is right now. Like I said, if the reference date was today, this this rebalance wouldn't be happening and Video would be the one being capped at four and a half percent. The next rebalance is September, So if Apple manages to stay larger than in Vidia on a float adjusted basis in September, we're going to
have the exact reverse of this. So usually these index providers in this case SMP and the ETF is ETF providers in this case Spider or State Street, they try to keep the indexes exactly the same because they want continuity over time. I wouldn't be surprised if they look at kind of changing the rules about how they meet those diversification requirements rather than just arbitrary capping chopping off the third largest here. So that'll be something to watch
in the next few months. But if they don't, we could come to the September and see like a reversal of this, or if Microsoft is somehow smaller than Nvidia and Apple, that will be the one that get sold and Apple will be bought. It'll be very interesting to watch what's going to happen. And this is like, this is an area that hedge funds are paying very close attention to and making markets. You asked if it's actually
impacting markets. There are a whole teams out there that are watching for what these behemoth passive products are doing and what they're going to have to do in rebound dates and basically prepping for it.
I want to see what like water cooler talk is with him and Eric Beltuna's oh gee, and they're like, hey, bro, let's check out this ETF and look at this flow.
It's so cool.
I just I just joke, because you guys are are so smart and so insane when it comes to all of these details with ets. But this is really helpful and we appreciate it and thank you very much. And it really helps to understand what happens with the Nvidia and an Apple when you have this kind of reshuffling. Right twice seventy one billion dollars that etf reshuffling. That's not nothing. And I'm looking forward to the Russell two thousand.
I feel like we should.
Definitely talk about that next week too. Just like a small caps have just not been able to keep up, and any keep up they have is like super micro at that point exactly.
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Another headline that crossed earlier today is that Canada is apparently preparing tariffs on Chinese evs after the US and the EU did something relatively similar. We wanted to get more on that with Steve Man, Bloomberg Intelligence, Global Autos and Industrials research analysts. Hey, Steve Walker, us through so far what we know on this?
Yeah, so Canada is basically following what the US and the Europeans have done, which is to slap potentially one hundred percent tariff another one hundred percent tariff on Chinese made cars coming into Canada. Now, the impact is very is muted. First of all, Canada sells about one point seven million vehicles a year compared to around sixteen million in the US thirty million in Canada in China, so
the market is relatively small. I think the overall purpose of doing that is really to close the back door in the US Mexico Canada Free Trade Agreement to make sure that you know, Chinese cannot bring cars into the US through Canada.
Okay, talkers about the Chinese EV market, Steve, how big is it? You say, you have a SAR there thirty million cars a year. What's the share of EV's today and kind of where do you think it's going to go?
Yeah, it's it's it's pretty big. It's as much as twenty five percent now of annual sales. So you know, they've also, as you know, there's a lot of capacity in China. EV production capacity in China, and there's a lot of players out there. You know, a few of them trade here actually, Neo x pun Le Auto uh and so you know the government, you know, just to prop up consumer spending, actually rolled out some incentives to
sell more battery electric vehicles in China. And some of the incentives are you know, on trade ins, you know, extra credit on trade in trading in their ice vehicles for the battery electric vehicles. So you know, twenty five percent now probably expected to row through the remainder of this year.
So here's my question, if I'm a Chinese EV company, Can I then just go through Mexico because I appreciate this closes the window from Canada, so I can no longer really important to Canada and then through to the US because the tariffs will hit. But in Mexico I still can, right, So why not just ship all the EV's in there free trade agreement, ship all the EV's into the US.
That is true, But just like what Canada did, I think they're going to close that back door as well at some points. But but look, the Chinese automakers, especially like BYD, has made it clear, uh that you know, they don't have any interest in entering the US market at the moment.
And it's difficult.
It's not it's not like they you know, you can say, oh, I'm coming in and selling cars in the US, and then you know you're you're able to be able to get a lot of gain a lot of customers just by doing that. You know they're gonna have to build a distribution network, they have to build a service network, and more importantly, given the geopolitic goal wrangling that's happening between the US and China, I'm not sure if a lot of the US car consumer are ready to buy a Chinese car at the.
Moment, What do the Chinese automakers say, Steve about these tariffs in the US and the EU Canada. I mean to what extent, how impactful are these to their sales and what are we hearing from these Chinese automakers.
Yeah, I think at the moment zero impact from the tariffs in the US and Canada.
There will be some impact from the tariffs in the EU.
They do have about two three percent market share in the in the in the European Union. But you know, the tariffs is not as as big as it is in the US. It's it's upwards of you know, thirty eight to fifty percent, and it really depends on the allmaker.
For example St. Lentists.
You know, they do plan to import some Chinese made evs into Europe through their new joint menture with Leap and Motor.
Uh.
But uh, you know so because you know Stulentis also has plans to with this h with Leap Motor within this joint mensure to build cars in Europe, the terrorists is a little bit lower. So terrorists are different for different automakers within the EU. So uh, you know, the penetration rate, you know, will be impacted. But I think over at the end of the day, Chinese will be able to still able to sell cars in the EU, but at a higher cost, and it gives the the incumbents some room to to actually grow.
What what do you think the differential will would be Like an E a Chinese EV into Europe would cost X and and Volkswagen EV would cost y. Like what do we think that differential will actually wind up?
Yeah, it ranges I think between thirty to fifty percent cheaper. The Chinese EV will be thirty to fifty percent cheaper.
Even with the tariffs or without the tariffs.
No, without the tariffs. So first of all, without the tariffs, and I think what the terriffs are trying to do, and not only the tariffs, any cars that actually comes into the EU from China will have to meet the local safety requirements. So there's going to be some changes that the Chinese automakers will have to make to their
cars to meet those requirements. So overall, you know, with the changes of vehicles with the tariffs, what the EU is trying to do is make, you know, ensure that the prices of the Chinese car when they do hit the ground, will be very competitive to the EV's made by the local automakers there.
Hey see, what's the latest thinking coming out of Detroit about electric vehicles? Obviously, you know, a couple of years ago they really started ramping up aggressively. Then demand seems to have faded here, so they're they're pulling back on some of their plans. What's the latest thinking from our US automakers about their move to EV's.
Yeah, I was just at in Detroit last week, and you know, every I think the consensus is that EV battery evs are here to stay. You know, some of the estimates that we saw a few years ago when we you know, when we're thinking about BV is gonna hit you know, seventy five eighty percent on the market is not unlikely to get there anytime soon. And and if you look at global market, especially in the US, we're going to have a mix.
Of powertrain, but BV will grow.
I think some of the estimates out there, including ours at BI, we think the US market will probably hit you know, twenty five to thirty percent penetration rate by the end of the day decade, so from about nine percent today. So at different ominae kids are taking different strategies. If you look at the Lentis, you look at GM, they're fro on, They're still launching a lot of EV's the next couple.
Of years more affordable EV's four is taking a step back, right.
I think they it's not a bad strategy. They know the technology, they know how to build evs, so it doesn't hurt. It saves cash for the time being until they see critical mass and they can easily come back to the market.
All right, Steve, we appreciate it. Thank you so very much.
Steve Mann, Bloomberg Intelligence, Global Autos and Industrials research analysts.
You have to wonder what policy though.
We were talking to the Tahlion right, and they used to make basic trucks like EV trucks, right, And they said, look, the policy just wasn't there, and the demand just wasn't there, and we just couldn't sustain that part of the business. If we get a different administration, does that change, If we get different ruling in the EPAID does different things? Is that also change? Like what part of policy plays in demand?
Yeah?
I think what we learned and what we're still learning is it's got to be priced competitive. Yes, the charging storage situation is going to be vastly improved. And you know, I also think there's still a political thing there that I'm not sure they're going to be able to get over.
Yeah.
I think there's going to be some kind of political divide there where people are.
Right, it's going to be like a political stance.
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Alex Steel, Paul Sweeney. We're live here in our Bloomberg Interactive, Brook Christinia. We're streaming live on YouTube, so you can head over to YouTube dot com and search Bloomberg Podcast and that's where we go find this. We just heard Vinie and Charlie talking about existing home sales four point one one million. That's off slightly from the prior period.
I went back and did the old GP function and set the tab to max to see how far back we could go, just to put that four point one one million homes sold in the month in context, and we usually do since like two thousand, about five point three million, so it's definitely below kind of where we were, and you know, hire interst rates and all that kind of stuff, and just people getting priced out. I wonder
what that means for mortgage backed securities market. Mortgage backed securities, the Bloomberg Index of mortgage backed securities total return off about zero point one four percent here year to date. So what do we do here in the back half of the year. Let's check in with Erica Adelberg. She covers all this MBS stuff for Bloomberg Intelligence. She joins
us here in our Bloomberg Interactive Broker studio. So as we sit here year mid year, Erica, how do you think about the back half of the year for mortgage back securities.
Well, it's been a pretty interesting first half of the year, so let's just talk about that for a minute. As of two months ago, mortgages were down more than two percent in total return and on an access return basis versus treasury is about seventy five basis points. And since the FED reinstated, they're kind of one sided market where they probably won't tighten, but they're hoping to ease at
some point this year. The markets were covered great, so you know, we're back to almost flat as you said for the year on total return, we're almost plad in excess returns too. So what happens for.
The rest of the year.
We think we could probably.
Hold on to this. We don't think there's tremendous momentum right now. You would think there would be given the two months, but the problem is we're still on hold awaiting the FED and supplies great because there's not a lot of new homes, but net supply is actually increasing because what's not happening in existing homes is getting put
into the new home market a little bit. So we're actually seeing some increase in net supply of mortgages, especially when you take into account the fact that the FED is you know, not buying. In fact, they're allowing their portfolio to run off, which contributes effectively more supply.
Well, it's what I was wondering, who's buying these things.
It's mostly money managers right now, and they're not the most reliable buyer inasmuch as if as friends get too tight, for instance, they may.
Pull back a little bit.
We're seeing some of the largest money managers right now being quite overrated the sector, So that might limit the amount of dry powder they have, you know, should they get concerned about the sector for one reason or another, or even just if that supply does pick up.
Someone comes up to you in a COCTA party and says, and when someone comes up to you to Cockta party and says, what's a thirty ye mortgage? These days? What ticker do you put into Bloomberg terminal?
I generally put in if I want a very short term thing, I put in their fixed thirty or fixed MB thirty or the fread. Yeah good, it's all I needed And that's the fastest one to type.
Okay, MB thirty. So how how does the mortgage market react to kind of what the Fed's doing? How quickly does that work? How tight is it if we're going to get the FED start cutting into the back half of the year. Does a mortgage market anticipate that?
Do they?
Lag?
How's that work?
It really doesn't anticipate it much.
Okay, It's going to be based basically on what happens with the tenure, and the tenure will be a little bit more forward looking than short term rates.
You know, it may look to what.
The Fed's going to do next year, for instance, but basically, right now, I think our rate strategist thinks that the ten yure is going to finish the yearround three seventy nine. That's less than a fifty basis point rally from here, So we really don't expect mortgage rates to finish inside of six point fifty at the end of the year anymore.
I go back to who's buying again? Are banks buying mortgage backed securities? And like, will that change?
That's a good question banks. Unusually for the banks who are usually a huge fan of mortgage backed securities, they when the FED started tightening, they were facing a lot of profit and loss unrealized gains losses on their balance sheets, and they were worried about volatility as well. So you know, after SVB collapsed, for instance, they just stopped buying mortgages altogether. In fact, they they didn't even reinvest their paid out so they were running off their portfolios too.
And then you combine that with the fact that.
You know, the FED, it's a lot of extra supply for the rest of the market to absorb.
They have leveled off.
Now they've started at least apparently reinvesting their paydowns, so that's a little bit of a less negative technical for the sector. But they really haven't come in in any significant size. We think that, I mean, there are two things that might happen. One is they just get more confidence once the FED starts to ease or at least starts really saying that they're about to ease. But we also think they might want a less disinverted yield curve
or less less inverted yield curve double negatives. Get it mixed to right, Yeah, So so they might they you know, there's not a lot of incentives to them invest in a longer term security if it's yielding less than their funding right now.
When I talk to credit an, I'll say, talk to us across about how tight credit spreads are. Is that a similar situation in the mortgage backed securities market.
When you look at like the OS the mortgage market right now relative to the corporate market, it looks like relative to the past ten years that mortgages are really quite cheap. Corporates have done super well. But if you look back to pre financial crisis, before the FED held as many mortgages as they do on their portfolio. We're actually, you know, at a point where you know, maybe mortgages don't look so cheap to corporates anymore. They used to
trade at a wider range. So it kind of all depends on your perspective and how much you think you know that the FED may come back in or not as a buyer of last resort if something goes wrong in the mortgage market.
So at the end of the day, really we have to think about the affordability part of this equation, right, like it.
Is who's mining, So that's part of it.
But the affordability what do you think gets everything more affordable and kind of gets this market really moving?
Yeah, I mean the funny thing is, you know, like like any bond investor, you know, I always like to say what's good news for consumers, and the economy is often bad news for bonds, So you know, the bond's rally when the economy is not doing well. And supply for mortgages, actual supply, not just net supply, would pick
up if the housing market got more affordable. So we don't necessarily want that, I mean, mortgage originators to do, but mortgage investors may not, but I think it's going to have to take We're going to have to wait for rates to fall down because home price is today the existing home prices hit a new record at four hundred and nineteen thousand.
For the median home price.
And you know, although inventor inventories are building a little bit, if anything, they'll probably only build enough to kind of stagnate prices, so that what it takes is median incomes, you know, overtime growing and you know rates coming down over time.
I mean, this great, great chart about who's buying, who's selling the Federal Reserve a year to date minus ninety minus ninety two billion or is that a percentage, because it then neutral funds are buying, dealers are buying.
That's minus ninety two billion in the first quarter. But you know, if you look at it, I do with chart, and I think.
You're actually looking at it.
The Z one holdings from the Fed and until now from March twenty two, March twenty two until now, when the Fed and the banks are running off their portfolios, households, it's called households, we're the only ones buying. Actually, they were really making up the difference. But the problem with that household number is it's a little inscrutable because it's actually the plug that the FED puts in there for anybody who doesn't fit into the insurance or the money
manager or the redial fund. So we know it's a lot of private net well they call it households. We know it's a lot of a few hedge funds. But yeah, they let their portfolios run off last month, which is interesting. It's a trend to watch, but not a trend to be too concerned about yet.
All Right, so I'm not I got the NB thirty year mortgage six point ninety four percent, so the bodinesses were below seven percent, but we're nowhere near me refinancing my six percent. I'm holding on to this thing. Eric Adelberg a Chief mortgage back security Strategies for Bloomberg Intelligence.
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