Don’t Fight The Fed. Bankruptcy Hollywood Style. Where Is Smart MBS Money?

Don’t Fight The Fed
At this point, expectations are that the overnight Fed Funds rate stays near 0% well into 2011, if not further. And traders know the old saying, “Don’t fight the Fed”. We’ve already seen this with low rates – and no one expects rates to trend higher in the near future. For mortgage rates, there has been some good news lately. A recent speech indicates that the Fed will keep an eye on MBS spreads and step in if spreads get too wide. Prepayments have been predictable and manageable. And MBS investor demand has been strong. If rates rise, the primary-secondary spread remains wide enough that originators have ample room to tighten (lower profit margins) if they want to maintain refi volume. And if even if rates fall further, traders believe that originators will remain somewhat reluctant to lower rates much into the high 3’s. (Even a move from 4.25% down to 4.125% puts the mortgage into a different, possibly still illiquid, security, and lenders are slow to do that.)

As we all learned in geometry, it takes two or more points to make a line, and although there is always a lot of anticipation in the press about the monthly employment numbers, one should keep in mind the trend rather than the actual data point. Of course now we are dealing with “QE2”, which is not the cruise ship Queen Elizabeth II but instead Quantitative Easing 2, which is something that the Fed is considering if the economy heads down again or is wallowing. But with yields trading at record lows, a lot of that (the Fed doing another round of easing) has to be built in already. Of course, one component that can push rates higher is our economy’s deficit, and the need to sell US Government securities to finance it, and in fact we have another auction next week.

Yesterday MBS’s finished up (better) between .250 and .375 and only $1.7billion was sold. One trader wrote, “Higher coupons are the best performers by multiple ticks helped by heavy money manager buying all day. 3.5s are the worst performers with supply focused there and demand almost entirely in higher coupons.” 10-year notes were about unchanged at 2.40%.

Jobs Report Summary
This morning Nonfarm payrolls came in at -95,000 with a 9.6% unemployment rate; hourly earnings were unchanged. Private sector jobs picked up 64,000. Rates once again have moved down, we find the current yield on the 10-yr at 2.37%, and mortgage prices better by .125-.250. Monday is a Federal holiday, and there will be no commentary – have a good weekend.

Bankruptcy Hollywood Style
Poor Toni Braxton filed for bankruptcy again, showing that the economy and the housing market hit all of us. According to Access Hollywood (who says I am not well read?) the 43-year-old singer lists her debt between $10 and $50 million and lists her assets somewhere between $1 and $10 million. (That is quite a range!) She owes money to AT&T, Verizon, Sprint, Tiffany & Co., The Four Seasons Hotels, DirecTV, Neiman Marcus, Orkin Pest Control, American Express, FedEx, the IRS, and the DMV’s in Nevada and California. Apparently she and her company filed Chapter 7 “following a prolonged health crisis that hindered her ability to work and perform…this course of action will enable her to fulfill her obligations to the IRS, rid her of upside down real estate in Atlanta and take care of her two small children.”

Smart MBS Money In Non-Refinancable Loans
The lack of ability for some borrowers to refinance is not lost on astute investors and they have been shifting money into securities tied to debt from homeowners who are the least willing or able to refinance. Fannie Mae-guaranteed securities with 5.5% coupons (which represent outstanding mortgages in the 5.75-6.125% range) that are backed by 30-year mortgages with average balances of less than $85,000 have improved in price more than similar generic debt. Homeowners with smaller loans don’t benefit as much from a drop in monthly payments as borrowers with bigger mortgages, while facing similar closing costs, and are thus less likely to refinance.

7th Notable CMBS Sale of 2010
On the commercial side of things, J.P. Morgan Chase sold $1.1 billion of commercial-mortgage securities yesterday in the largest transaction of its type in a very long time. Good news for that sector, the triple-A rated tranche with a 10-year term was priced at 1.50 percentage points above the benchmark swaps rate, to yield 3.959%. That compares with a spread of about 305 basis points on comparable bonds issued prior to 2008, when underwriting standards were more lenient, JPMorgan data show. It is the 7th notable CMBS sale this year, and hopefully signals bank willingness to lend to stronger borrowers, and investor confidence that landlords can meet monthly payments as the economy recovers.