Retail Sales Up 4.7% YOY, Hope For Mortgage Brokers (as opposed to Bankers)?, Treasury Auction Results
Treasury vs. MBS Performance
The $16 billion 30-yr bond auction yesterday almost seemed like an afterthought with traders focused on the buyback news. The 10-yr yield was well above 3.60% (not good), and the 30-yr yield came in at 4.72% – the cheapest level a 30-yr auction has come in at since June. But at least it is out of the way! Current coupon mortgage securities are now trading at a yield above the 10-yr of about 66 basis points, and this spread may go even lower if the markets feel that delinquency risk is minimal. Since the end of December the yield on the 10-yr has dropped by 40 basis points (from 3.92% to 3.54%) and now we have given a portion of that up.
Hope For Mortgage Brokers?
Is there hope for mortgage brokers? Many believe so, and this is one indication of that.
European Bailout Plans
How many countries use the Euro for a currency? Sixteen, and it appears that they have banded together to forge a plan in spite of European Union law offering no clear procedure for staging the first bailout of a euro zone country in the currency’s 11-year history. Some countries, like Germany & France, have been less impacted by the downturn, and are in a better position to offer aid. Athens needs to borrow about 53 billion Euros ($73 billion) this year to cover a huge budget deficit and refinance debt which is coming due. But investors have taken fright over the risks involved in buying Greek bonds, and the government could slide toward default if they boycott future debt auctions.
Retail Sales Up 4.7% YOY Through December
This morning the delayed Retail Sales figure was released. Sales rose more than expected in January, according to the Commerce Department, +0.5% after falling by a revised 0.1% in December. Sales, compared to January ’09, were up 4.7 percent. We are seeing a bit of a bounce in bond-land, with mortgage prices better by .125 and the 10-yr hovering around 3.70% ahead of the holiday weekend. (There will be no commentary on Monday – have a nice 3-day weekend.)
Timber Market Booming
How much wood can a woodchuck chuck if a woodchuck could chuck wood? They’d better do more now, since timber is booming. Some in the industry follow U.S. lumber production. Through November this totaled 21.2 billion board feet, down 23.0% from the January-November 2008 figure, according to the Western Wood Products Association. Nationwide, November 2009 production totaled 1.620 billion feet, down 16.6% from the November 2008 total and off 18.9% from October 2009. Recently, however, lumber futures hit 29 month highs last week ahead of an anticipated strong Spring building season. Mills are cranking up again, demanding wood they haven’t been buying in a year, lumber distributors have been forced to restock supplies, and visitors to Home Depot are coming away scratching their heads.
Fed vs. Fannie/Freddie MBS Buying
Investors and Wall Street traders continue to conjecture and ruminate about the “Frannie” announcements on Wednesday, which initially met with a response similar to a gal realizing that her boyfriend is going to wear sweat pants on a date. Traders continue to talk about the massive amount of float ($200 billion) that will be taken out quickly, the estimate that Freddie Mac will buy out about $72 billion and Fannie Mae to buy out $127 billion of mortgage-backed securities. Whether or not Freddie and Fannie have to sell existing holdings, and have room under their portfolio caps, to come up with the capital remains to be seen. Will the Treasury pony up the $200 million? Freddie Mac expects to purchase “substantially all” of its 120-day+ delinquent loans by the March prepayment report, whereas FNMA expects to begin its loan repurchase program by the April report, and to remove most of its delinquent loan pipeline over the subsequent few months.
Given that the Fed has been buying more new production than older stuff, very few of these bonds are likely to be bonds held by the Fed, so the impact on the non-Fed MBS float is even greater. One student of the markets ventured that various government entities own maybe 50% of these bonds so maybe half the $200 billion goes right back into the government’s coffers – hopefully they didn’t pay a big premium for the securities if they’re bought back at par. And any entity that has bonds purchased may turn around and buy more MBS’s – which would help mortgage rates and originators. After the buyouts are completed, prepayments on Fannie Mae and Freddie Mac securities would be easier to predict, making the bonds less risky, because the debt would have “limited delinquencies” and “limited rate refinancing risk.
Now, who are Freddie & Fannie going to sell those delinquent loans to? They just don’t go away now, do they? And as 90 day loans become 120 day loans, they will be bought also. If Freddie’s analysts expect the loans to cure, they will probably keep them on their books in securities, although it will take a few months to figure ascertain their position on these loans. For Freddie, given their $1.8 trillion “universe”, the 330,000 of loans they will be buying back represent less than 4%. And the fact that both firms are doing this relatively quickly, although Fannie has a much larger amount of delinquent loans to process, is expected to minimize the long-term disruption in the market, which will help the mortgage market.
The Freddie & Fannie news has certainly given traders some volatility with which to play. Selling higher coupons, and figuring out what to do with the one-month window for March settlement to sell FNMA premium securities. But the prices of those securities have been driven down, and in addition traders saw a heavy day of selling yesterday. Flows included more “down in coupon” and outright selling in higher coupons from hedge funds and money managers, and interest in lower coupons by the same money managers.
Daily Humor
A priest and a rabbi were sitting next to each other on an airplane.
After a while, the priest turned to the rabbi and asked, “Is it still a requirement of your faith that you not eat pork?”
The rabbi responded, “Yes, that is still one of our laws.”
The priest then asked, “Have you ever eaten pork?”
To which the rabbi replied, “Yes, on one occasion I did succumb to temptation and tasted a ham sandwich.”
The priest nodded in understanding and went on with his reading.
A while later, the rabbi spoke up and asked the priest, “Father, is it still a requirement of your church that you remain celibate?”
The priest replied, “Yes, that is still very much a part of our faith.”
The rabbi then asked him, “Father, have you ever fallen to the temptations of the flesh?”
The priest replied, “Yes, rabbi, on one occasion I was weak and broke my Faith.”
The rabbi nodded understandingly and remained silent, thinking, for about five minutes.
Finally, the rabbi said, “Beats the heck out of a ham sandwich, doesn’t it?”