In April 2025, US housing starts reached 1.361 million, just below the forecast of 1.365 million. Last month, housing starts were at 1.324 million. Building permits in April were reported at 1.412 million, also lower than the expected 1.450 million. In March, permits stood at 1.467 million. The National Association of Home Builders recently reported a sentiment that is at its lowest since 2022. Additionally, US 30-year yields have climbed to 5% this week. This latest housing data indicates a small softening, especially in forward-looking indicators. The slight dip in housing starts suggests that construction is not gaining the expected momentum. However, the upward revision of last month’s figures hints that activity may not be as slow as it seems, although this month’s shortfall still affects near-term forecasts. More concerning is the decline in building permits, which usually precede actual construction by one or two quarters. The drop in permits shows that developers are cautious about investing, especially with high borrowing costs. This hesitance has led to a more pessimistic outlook among builders, marking one of the lowest points in three years. The 5% increase in 30-year yields is not just a rise in long-term rates; it reflects how the fixed-income markets are adjusting their views on inflation and future policies. Those borrowing for long-term projects will feel the impact the most, as rolling over existing debt has become costlier, particularly for those with heavy leverage who cannot wait for lower rates. From a trading perspective, rate-sensitive instruments are reacting more to this kind of news, even if the deviations are minor. The broader response in housing-related stocks and rate futures shows that markets are reassessing risk across various assets rather than just focusing on the main numbers. One notable observation is the shrinking gap between monthly starts and permits. When permits decline faster than starts, it typically indicates that construction activity may slow down in the months ahead. This trend doesn’t resolve quickly; it suggests that construction flow may face ongoing challenges rather than an immediate shock. With long-term rates at 5%, we need to adjust our expectations for implied volatility across the yield curve. Recent trading has shown an increase in out-of-the-money payer skew. In terms of options pricing, the mid-range of the curve is now more expensive than in recent weeks, suggesting traders anticipate movement in instruments with mid-term durations as well. Looking ahead, we expect more fluctuations based on upcoming inflation and employment data. If consumer borrowing weakens alongside housing, investors holding fixed income may test the patience of shorts. Until then, the steeper curve benefits steepener trades, particularly between 2s/10s and 5s/30s, as funding costs become more apparent. It’s crucial to remember that the mix of declining permits, negative sentiment, and high rates dampens demand. Homebuilders are not only reacting to debt costs but are also gauging future demand from banks and buyers, who are becoming more cautious. It’s essential to watch for changes in mortgage applications and secondary market flow. These indirect indicators often predict what we will eventually see in the official permit and start reports. In the current environment, even minor disappointments in data are significant. They contribute to a broader understanding of shifting growth risks, with construction being one of the first industries to show changes. Additionally, any signs of tightening labor in the construction sector could challenge the case for easing, even if housing data continues to weaken. So far, we haven’t observed this, but it’s an important aspect to keep an eye on. Trading desks should remain agile and avoid relying too much on static calendar spreads. Quick adjustments based on real-time data will lead to better results in these conditions.

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