THE BASIS POINT

GOP Leader Who’ll Decide Fannie & Freddie Fate. Rates Rise On China Inflation Fear.

Politicians Now Leading Financial Regulation
Ronald Reagan said that “The taxpayer is someone who works for the federal government but doesn’t have to take the civil service examination.” Taxpayers pretty much own Freddie and Fannie, and the latest news is that U.S. Rep. Scott Garrett (R-NJ) will be chairman of the House Financial Services Committee overseeing financial markets and the mortgage giants Fannie Mae and Freddie Mac next year. “While there will be a number of very important issues on the subcommittee’s plate during the 112th Congress, winding down Fannie Mae and Freddie Mac will be priority No. 1,” Garrett said in a statement. “With the American taxpayers already on the hook for $150 billion and counting to bail them out, we need to be taking concrete steps to reduce the ongoing financial risk they pose to the country and eradicating the bailout culture of Capitol Hill.”

In addition, Joseph Smith, who is Obama’s nominee to be the director of FHFA (the regulator for Fannie, Freddie, Federal Home Loan Banks, etc.) and is currently the North Carolina banking commissioner, has been meeting with senators, congressional staff and other officials. Obama must offer Congress a plan in January for reorganizing the agencies. The Senate Banking Committee, and then the full Senate, must vote on Smith’s nomination this month before Congress adjourns. Otherwise, the nomination expires and Obama must put forward his name again in the next Congress.

Bonds Still Dropping, Rates Rising
On Thursday mortgage-backed security prices closed about unchanged from Wednesday afternoon’s levels on slightly-less-than-average volumes. Interestingly, inflation still trending lower, this has left the real (inflation-adjusted) 10-year rate at one of the highest levels it has been in during the last ten years. As usual, as Paul Jacob from BOM points out, either the markets are pricing in a big upswing in inflation going forward, the market’s pricing in terrific growth for 2011-2012, with Fed tightening just around the corner, or lastly the market’s become very afraid of dollar-denominated debt because of the fiscal deficit. Or maybe this selloff was overdone.

Chinese inflation is another factor influencing the move lower in U.S. bonds like MBSs and Treasuries—which causes rates to rise. China today raised reserves required for banks to keep with the central bank in an attempt to slow their economy. Imports, exports, and inflation are all setting records in China, which has caused this latest central bank move to tighten—and more tightening seems imminent.

The $13 billion 30-year auction went pretty well, and certainly helped to keep bond prices “off the bottom.” The 30-year came “5.4bps through its 1PM level at 4.41%, a massive 49.5% allotted to indirect bidders the highest percentage since July 2009, 8.1 by directs and a 2.74 bid to cover.” Traders saw MBS buying from insurance companies and pension funds, and some originators buying back hedges. The 10-yr closed at 3.23%.

Today we’ve had news on import prices, the trade deficit, and consumer confidence. Import prices for November were expected +.8% and the trade deficit was anticipated to drop slightly. The October trade deficit was only $37.8 billion, and import prices were +1.3%. And consumer confidence was reported at a six month high. After this somewhat minor news we find the 10-yr back up to 3.27% and mortgage prices worse by .125-.250.