Tag Archives: Mortgage-Backed Securities

News recap comments

Posted on by

The news flow from last week was so voluminous it was nearly impossible to process. For good measure I want to start today’s commentary with a simple recap of what happened.

On the negative side –

· Greece called a referendum and threw bailout plans up in the air taking Greek 2yrs from 70% to 90% or +2000bps.
· Italian 10yr debt collapsed 40bps with spreads to Germany out 70bps. The moves were far larger in the 2yr sector.
· France 10y debt widened 25bps to Germany. At one point spreads were almost 40 wider.
· Italian PMI and Spanish employment data were miserable.
· German factory orders plunged 4.3 percent on the month.
· The planned EFSF bond for 3bio was pulled.
· Itraxx financials were +34 while subs were +45.
· Draghi predicted a recession for Europe along with disinflation.
· The G20 was flop – there was no agreement on IMF involvement in Europe.
· The US super committee deadline is 17 days away with no clear agreement.
· The 8th largest US bankruptcy in history took place.
· US 10yr and 30yr rallied 28bps, Spoos were -2.5%, the Dax was -6% and EURUSD was -3%.
· German CDS was up 16bps on the week.

On the positive side –

· The Fed showed its hand with tightening dissents now gone and an easing dissent in place.

Too bad what they call ‘easing’ at best has been shown to do nothing.

· The Fed’s significant downside risk language remained intact.

Downside risks sound like bad news to me.

· In the press conference Ben teed up QE3 in MBS space.

Which at best have been shown to do little or nothing for the macro economy.

· US payrolls, claims, vehicle sales and productivity came in better than expected.

And the real output gap if anything widened.

· S&P earnings are coming in at +18% y/y with implied corporate profits at +23 percent q/q a.r.

Reinforces the notion that it’s a good for stocks, bad for people economy.

· Mortgage speeds were much faster than expectations suggesting some easing refi pressures.

And savers holding those securities saw their incomes cut faster than expected.

· The ECB cut 25bps and indicated a dovish forward looking stance.

Which reduced euro interest income for the non govt sectors

· CME Margins were reduced.

Just means volatility was down some.

· There was a massive USDJPY intervention which may be a precursor to a Swiss style Japanese policy easing.

Which, for the US, means reduced costs of imports from Japan, which works against US exports, which should be a good thing for the US as it means for the size govt we have, taxes could be lowered to sustain demand, but becomes a bad thing as our leadership believes the US Federal deficit to be too large and so instead we get higher unemployment.

· The Swiss have indicated they want an even weaker CHF – possibly EURCHF 1.40.

When this makes a list of ‘positives’ you know the positives are pretty sorry

· The Aussies cut rates 25bps

Cutting net interest income for the economy.

Share

Re: Agency details

Posted on by


[Skip to the end]

(an email exchange)

>   
>   On Sun, Sep 7, 2008 at 8:33 PM, Mike wrote:
>   
>   
>   In exchange the Treasury receives a quarterly fee, dividend payments and
>   ”warrants representing an ownership stake of 79.9% in each GSE going
>   forward.”
>   
>   Support of Agency MBS market: The Treasury will set up an investment fund
>   to “purchase Government Sponsored Enterprise (GSE) mortgage-backed
>   securities (MBS) in the open market.” The scale of this program is yet to be
>   determined. The Treasury noted that it “is committed to investing in agency
>   MBS with the size and timing subject to the discretion of the Treasury
>   Secretary. The scale of the program will be based on developments in the
>   capital markets and housing markets.” This should eliminate the majority of
>   investor concerns about the functioning of this market, improve liquidity and
>   lower borrowing costs.
>   
>   Credit facility: The Treasury has agreed to create a back-stop short-term
>   lending facility for the Agencies. In light of the other programs being put into
>   place, this seems unlikely to be utilized, in our view.
>   

Shareholders give up 79.9% of their residual value as the agencies wind down.

Must have been some technical reason the government used that % and left the shareholders just north or 20%.


[top]

Share

Agency take over

Posted on by


[Skip to the end]

Recap:

  1. If I’m reading it right, the agencies will fund directly through the Treasury. I’ve been suggesting this for many years. This lowers the cost of funds for housing, the point of the entire program, by removing a premium that’s been paid by the lack of an explicit guarantee.
  1. Agency portfolios being phased out, to be replaced by direct purchasing of the MBS (mortgage-backed securities) by the Treasury. This has no real implications for the non government sectors, just accounting on ‘their’ side of the ledger. But it does mean lending can continue and funds will be available for all eligible borrowers.
  1. Some kind of government preferred stock coming between profits and the remaining shareholders of various classes. This should leave stocks with some value depending on actual portfolio losses, unless I’m missing something.

 
I’d guess most markets have been pricing in worse outcomes than this.


[top]

Share