Just wrote a new blog. No profit motives here. I just like analyzing and discussing this stuff. Please have a read and discuss.
The paragraph that changed the world:
<a href="http://www.ustreas.gov/press/releases/hp1129.htm ">From Today's Fannie Mae & Freddie Mac press release today:
</a>
<blockquote>Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS. During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we've seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. Treasury will begin this new program later this month, investing in new GSE MBS. Additional purchases will be made as deemed appropriate. Given that Treasury can hold these securities to maturity, the spreads between Treasury issuances and GSE MBS indicate that there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains. This program will also expire with the Treasury's temporary authorities in December 2009. </blockquote>
Nowhere do I see language specifying limits to MBS purchases. This sends a message with potentially scary results for anyone vulnerable to a high interest rate environment, since a large fraction of MBS agency exposure now becomes a potential liability to the US government. Considering $5 Trillion of mortgageback debt added to a $9 Trillion deficit (only $5 Trillion of that being due to parties other than the US government itself), this has an unavoidable potential to impact US debt credit quality, not to mention capital inflows towards dollar purchases.
While the spread between agencies and treasuries will tighten, we may witness an environment where long dated debt of all types experiences skyrocketing yields, potentially undoing the benefit of this policy change.
I can only imagine the Fed will counter this deflationary prospect with further supression of short term interest rates. At this rate, I could picture new mortgages being given with synthetically low rates created by some unnamed future program, not reflective of treasury yields or past agency spreads. This will incur further risk to government debt and call into moral question what level of involvement the government should have in the mortgage debt markets.
On the bright side, a gigantic spread between fed funds (1% or under potentially) and 30 year debt (8%?) would result in an accelerated refunding of the banking system, that is unless the volumes of loans slowed enough to undo the net benefit of this spread. Or worst case: we could turn into a nation where all consumer and house loans were done on short term floating rates, since nothing on the long end would be affordable enough. This only opens the door for further nightmares when the government must eventually raise rates as the economy accelerates too quickly.
The prolonged equity market reaction might not be as bullish as some of us hope either, since higher interest rates imply a higher demand for earnings yield, putting price support much lower. Furthermore, the effect of increased credit costs to companies does not need to be spelled out.
The prospect of a Japan repeat for the U.S, with short term rates hugging 1% for a while, is a distinctly viable possibility. In summary, never before in my lifetime have I seen the credit quality of U.S. debt be possibly challenged. I would be surprised if the markets opened on Monday with complete denial of this prospect.
For the sake of Pimco's Bill Gross, I hope he is short the spread between treasuries and agencies, because he may not get the pop he is desiring on agencies if he is long only.
While it is obvious home prices need to come down closer to fundamental value in many areas, I hope all of this article is an incorrect postulation. The ramifications of this move could be disastrous and have depressive implications going forward. And since I am not exposed nor short to treasuries, I do not stand to benefit from this prognostication.
http://scriabinop23.blogspot.com/
The paragraph that changed the world:
<a href="http://www.ustreas.gov/press/releases/hp1129.htm ">From Today's Fannie Mae & Freddie Mac press release today:
</a>
<blockquote>Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS. During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we've seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. Treasury will begin this new program later this month, investing in new GSE MBS. Additional purchases will be made as deemed appropriate. Given that Treasury can hold these securities to maturity, the spreads between Treasury issuances and GSE MBS indicate that there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains. This program will also expire with the Treasury's temporary authorities in December 2009. </blockquote>
Nowhere do I see language specifying limits to MBS purchases. This sends a message with potentially scary results for anyone vulnerable to a high interest rate environment, since a large fraction of MBS agency exposure now becomes a potential liability to the US government. Considering $5 Trillion of mortgageback debt added to a $9 Trillion deficit (only $5 Trillion of that being due to parties other than the US government itself), this has an unavoidable potential to impact US debt credit quality, not to mention capital inflows towards dollar purchases.
While the spread between agencies and treasuries will tighten, we may witness an environment where long dated debt of all types experiences skyrocketing yields, potentially undoing the benefit of this policy change.
I can only imagine the Fed will counter this deflationary prospect with further supression of short term interest rates. At this rate, I could picture new mortgages being given with synthetically low rates created by some unnamed future program, not reflective of treasury yields or past agency spreads. This will incur further risk to government debt and call into moral question what level of involvement the government should have in the mortgage debt markets.
On the bright side, a gigantic spread between fed funds (1% or under potentially) and 30 year debt (8%?) would result in an accelerated refunding of the banking system, that is unless the volumes of loans slowed enough to undo the net benefit of this spread. Or worst case: we could turn into a nation where all consumer and house loans were done on short term floating rates, since nothing on the long end would be affordable enough. This only opens the door for further nightmares when the government must eventually raise rates as the economy accelerates too quickly.
The prolonged equity market reaction might not be as bullish as some of us hope either, since higher interest rates imply a higher demand for earnings yield, putting price support much lower. Furthermore, the effect of increased credit costs to companies does not need to be spelled out.
The prospect of a Japan repeat for the U.S, with short term rates hugging 1% for a while, is a distinctly viable possibility. In summary, never before in my lifetime have I seen the credit quality of U.S. debt be possibly challenged. I would be surprised if the markets opened on Monday with complete denial of this prospect.
For the sake of Pimco's Bill Gross, I hope he is short the spread between treasuries and agencies, because he may not get the pop he is desiring on agencies if he is long only.
While it is obvious home prices need to come down closer to fundamental value in many areas, I hope all of this article is an incorrect postulation. The ramifications of this move could be disastrous and have depressive implications going forward. And since I am not exposed nor short to treasuries, I do not stand to benefit from this prognostication.
http://scriabinop23.blogspot.com/