THE BASIS POINT

The Purpose Of Treasury Auctions, Bank & Mortgage Earnings Roundup, Jobless Claims Up

Jobless Claims Up
This morning’s weekly Jobless Claims showed an increase to 457,000, slightly higher than expected, and the 4-week moving average is up 2k to 456k. Non-farm productivity came in at +1.9%. Unit Labor Costs were -.1% after adjusting for productivity. After this news and the Fed announcement yesterday (see below), stocks and mortgage bonds are up which means rates are down.

The Purpose Of Treasury Auctions
When the US Treasury sells billions in new debt every other week, does the money go toward increasing the deficit or toward paying off old debt? The answer is both. For example, yesterday came news that the Treasury Department plans to sell $72 billion in its quarterly sales of long-term debt next week as follows: $32b 3yr notes 11/8, $24b 10yr notes 11/9, $16b 30yr bonds 11/10. The whole thing will raise $58.2 billion in new cash, with the rest of the proceeds going to pay off maturing debt. After expanding debt sales to finance annual budget deficits exceeding $1 trillion for the past two years, the Treasury has more recently been scaling back auction sizes as lower projected budget deficits have allowed them to reduce borrowing. Most estimates point to a Federal deficit north of $1.2 trillion in fiscal 2011, $1 trillion in 2012, and $900 billion in 2013.

Which leads into yesterday’s announcement that the Federal Reserve will print money to buy an extra $600b of Treasury bonds by next June. Their hope is that the move will make it cheaper for us to borrow money, take out mortgages or refinance our houses, and for businesses to borrow funds in order to expand. Higher inflation and lower unemployment are the goals. The financial markets had priced in the Fed’s move for weeks, and stock indexes didn’t move much after the announcement. “The pace of recovery in output and employment continues to be slow,” the Federal Open Market Committee statement said. It will help by raising asset prices, like stocks, which might make some folks feel better and go out and spend.

Banking & Mortgage Earnings Roundup

  • >> Freddie Mac reported a $2.5 billion third-quarter loss, and is asking taxpayers for an additional $100 million in part to cover the cost of $1.6 billion in interest payments made to the federal government. Its loss was less than in recent quarters, a possible indication that mortgage delinquencies are slowing – but it, and the industry, is still grappling with delays in the foreclosure process which, combined with a slow housing market, will only cost more mo’ money.
  • >> PennyMac Mortgage Investment Trust reported net income for the third quarter of $7.7 million. Last quarter PennyMac invested $125 million in distressed mortgage assets, comprised of $73 million in nonperforming residential mortgage whole loans and $52 million in MBS’s using cash from existing investments and debt from security repurchase agreements on the Company’s mortgage-backed securities. Per its press release, “at the end of the quarter, the Company’s portfolios of residential mortgage whole loans and mortgage-backed securities were valued at $245 million and $137 million, respectively. After the end of the third quarter, the Company entered into a transaction to purchase nonperforming whole loans valued at $222 million. That transaction is scheduled to close in the middle of December.”
  • >> PHH (#7 in mortgage volume in the first half of 2010) lost $2 million in the 3rd quarter, down from a loss of $80 million a year ago. Mortgage closings increased, which helped revenue for the quarter increase to $572 million from $507 million last year. The mortgage-production segment of PHH had income of $161 million, while the servicing segment lost $194 million for a combined loss in the mortgage-services unit of $34 million. Mortgage closings were $12.7 billion for the quarter, up 26% over second quarter 2010 and 41% versus the period a year ago.
  • >> Bank of America and PNC Financial Services are reported to soon be reducing their investment in BlackRock by selling 42 million shares of its stock. BlackRock’s stock price is down almost 30% this year (including 4% yesterday), but the sale should bring in billions of dollars for BofA and PNC which will help them with cash needs and in focusing on core businesses.
  • >> Ally Financial came out with its 3rd quarter results showing the 3rd consecutive quarter of profitability. The company made $269 million of net income, and core pre-tax income of $636 million, compared to a net loss of $767 million for the third quarter of 2009. Ally’s position in the auto finance industry helped.