March 5, 2008
JQ: While The Fed Giveth (Cuts), The Street Taketh Away (Spreads)
"The extra yield that investors demand to own so-called agency mortgage-backed securities over 10-year U.S. Treasuries rose to the highest since 1986, boosting the cost of loans for homebuyers considered the least likely to default.
The difference in yields on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10- year government notes widened about 1 basis point, to 204 basis points, or 70 basis points higher than Jan. 15. The spread helps determine the interest rate homeowners pay on new prime mortgages of $417,000 or less. A basis point is 0.01 percentage point."
"Spreads tightened last week when the regulator for Fannie Mae and Freddie Mac, two of the largest buyers of the securities they guarantee, announced that temporary caps on their $1.5 trillion portfolio would be lifted. Investors have realized that the step was unimportant because the companies remain "capital-constrained," [a] New York-based UBS analysts wrote."
∙ Agency Mortgage-Backed Bond Spreads Reach Highest Since 1986 [Bloomberg]
∙ JustQuotes: What The OFHEO Are They Thinking? [SocketSite]
First Published: March 5, 2008 9:04 AM
Comments from "Plugged In" Readers
It's nice to know somneone is working on the light at the end of the tunnel...
Posted by: Michael L at March 5, 2008 9:15 AM
That light ahead is a growing credit bonfire at the back end of a deflation cave onto which bad collateral is being heaped.
Posted by: Debtpocalypse at March 5, 2008 9:26 AM
Hmm, interesting...time to buy marshmellow futures then!
Posted by: Rillion at March 5, 2008 10:17 AM
When investors are able to trust what they are buying and believe in the level of risk in these mortgage investments again, spreads will readjust back down.
Posted by: Dede at March 5, 2008 10:18 AM
A week or so ago, there was some talk about Fannie and Freddie "leading" the market up, because they spiked on news of the removal of the caps. That spike didn't last long.
Just for fun, take a look at the 1-year charts for them (FNM, FRE) and overlay 50-, 65- and 200-day moving averages. You will see an absolutely perfect TEXTBOOK example of "short to zero" companies. Death cross (50-day crashing through 200-day), total and continued failure at 50-day moving average resistance, etc. It doesn't look better for a short seller technically, so it is no surprise at all that bondholders are getting nervous. In the end, the USG could bail out housing by nationalizing the mortgage market and expanding FHA. But would they - or COULD they - make agency holders of Fannie/Freddie debt whole? And would they even want to, recognizing that the monetary printing that would be necessary to "bail out" agency holders would raise interest rates so high as to collapse the economy and crush the USG's ability to borrow at the low rates it enjoys today? (FNM + FRE debt is equal to approximately 60-70% of all the debt that the USG has issued since the beginning of the republic in 1789, and probably more than HALF the FNM/FRE debt has been added in the last decade!)
Just for reference, in the S&L crisis, debt holders and shareholders were basically wiped out (after the execs stole enough for themselves, of course), while the depositors were made whole. Not a good precedent if you are buying FNM and FRE paper, so again, no surprise that spreads are widening as this whole fantasy of rising housing values circles into the drain.
Fannie and Freddie are bankrupt. We are probably going to get the answers to some of those questions above sooner rather than later (like, shortly after the election....)
OT - just for fun, run those same moving averages for Google (GOOG). And AAPL. Just about as ugly, technically. Not "short to zero" candidates IMO, though.
Posted by: Satchel at March 5, 2008 10:30 AM
They are hard to short to zero with the government implied backstop. Otherwise I would be right there with ya.
Posted by: cooper at March 5, 2008 10:39 AM
we've all discussed that the Fed lowering rates on the Fed Funds may or may not cause mortgage rates to go down.
I've harped on this before. in 2003-2006 the Fed raised FFR from 1% to 5.25%, (4.25%) and yet mortgage rates barely budged (1-1.5% max).
Now the Fed is marching back down... but the 10 year and the mortgage rates are set by the market (unless the Fed monitized mortgages or the 10 year, unlikely at this stage IMO).
The Fed can do whatever it wants, and the 10 year may or may not follow based on treasury investors... however there's still that tricky little matter called "risk premium"... the banks and mortgage investors are demanding compensation for their increased risk: thus higher mortgages.
Posted by: ex SF-er at March 5, 2008 11:12 AM
The Fed is steepening the yield curve with its heavy cuts and pushing investors into shorter term treasuries. Inflation expectations continue to rise and more long term debt is dumped. So the Fed is moving the market but not in a way that helps home buyers. It does help banks, credit card debtors and people with ARMs. But it penalizes anyone trying to get a 30-yr fixed rate loan. Combined with the fact that the only liquidity available in the market is in conforming loans and you see the spread phenomenon mentioned in the bloomberg article...
Posted by: "Dave" at March 5, 2008 11:50 AM