Warning lights continue to flicker in overnight accounts. SOFR rates remain above the Fed’s Interest on Reserve Balances (IORB) by about 15 bps. The spread has continued to widen since the middle of September. The combination of news regarding souring loan portfolios at mid-sized banks, the failures of First Brands Group, TriColor Holdings, and PrimaLend and bank reserves falling from “abundant” to “ample,” has put markets on edge. The issue remains under control for now. The rise in overnight rates relative to the IORB is indicative of a system running out of room to run.
The good news that may prevent a repeat of the “taper tantrum” from September 2019 is that bank reserves are far higher now than they were then. The Fed’s Standing Repo Facility provides a ready backstop for potential liquidity crunches. Going forward, we’ll want to watch the level of excess reserves above banks’ internal minimums and balance sheet capacity for the Fed and major dealers. Also worth watching is the behavior of key spreads like SOFR versus Effective Federal Funds Rate or the IORB floor. Widening spreads equal reduced liquidity positions.
While the FOMC is largely expected to cut rates again next week, strategists at JP Morgan Chase issued a report this week projecting the Fed may formally end its quantitative tightening program at the same time. The report notes mentioned tight funding conditions at the Fed’s liquidity facilities may force the committee to cease its balance sheet runoff of securities and immediately begin temporary open-market operations to support macro-liquidity levels.
Another Texas subprime auto lender is going under. PrimaLend filed for bankruptcy this week after months of negotiations with creditors. Similar to TriColor Holdings, PrimaLend specialized in supplying loans for subprime borrowers through “buy here, pay here” arrangements with auto dealers. While the company intends to continue operations as usual under Chapter 11 funding from existing lenders, this highlights the continuing credit deterioration of the American consumer, especially in the subprime space. According to a separate report from Fitch, 6.43% of subprime borrowers are at least 60 days late on their car loans, a rate that has doubled since 2021. Cars are currently being repossessed at the highest rate since 2009. Cox Automotive showed the default rate for subprime borrowers was near 10% in September, down from a year ago but still above the long-term average. With no alarm bells going off for prime credit, the disparity reflects the K-shaped recovery we’ve experienced in the last few years.
After a delay caused by the government shutdown, CPI was released this morning with a month-over-month increase of 0.3%. With CORE CPI reported at 0.2% - these numbers reflect the smallest monthly jumps in three months. Year-over-year, both figures were up 3% versus consensus estimates for a 3.1% annual increase, which is the largest annual increase since January. The “low” CPI figures also clear the path for an additional rate cut in December. After the CPI release, the White House issued a statement that we may not get any CPI data for October as the funding lapse has prevented surveyors from deploying to the field.
KEY INDICATORS THIS WEEK
Mortgage rates - The rate on a 30-year fixed rate mortgage fell to 6.19% this week; its lowest level in 2025.
Next week - Fed meeting with an expected 25-basis point rate cut.