Mortgage Bond Prices Rise to 'Insane' Records: Credit Markets

Mortgage Bond Prices Rise to 'Insane' Records: Credit Markets

www.businessweek.com

The average price of $5.2 trillion of bonds guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae climbed to 106.3 cents on the dollar today, according to Bank of America Merrill Lynch’s Mortgage Master Index. That’s up from 104.2 cents on March 31, when the Federal Reserve ended its purchases of $1.25 trillion of the debt.

“It’s gotten insane,” said Scott Simon, the head of mortgage-backed securities at Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund. “This is rarefied air.”

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Well I appears we may be looking at the finale death groans of are beleaguered housing market.
The housing data this month shall we say just flat out sucked. A significant part of Americas overall GDP is directly tied to the housing market.
If housing dose a double dip, which apparently it is going to do now that the $8,000 tax credit has expired. Then it will drag the rest of the economy back down to its knees with it. All the data points to a slowing economy. Lets face it the FED cant keep artificially propping the market up for ever.


www.businessweek.com
(visit the link for the full news article)

The unintended consequences of a novel idea. Never done before, lets try it and see what happens. The test was in the auto industry, the after effect was not good, but not horrible either. Unfortunatley, its was done in a completely different industry. The housing tax credit was set to expire during the annual uptick in home sales, new home or otherwise. The choosen expiration date didn't work. The 33%decline in new home sales stunned the market. Suprisingly, it held through out the day, right until the Fed came out with its statement about Euro debt.

As far as a Double dip goes, don't buy to much into it. remember, the same people calling for a double dip said that commercial real estate and the banks that lent them money would be dead, gone and buried by now. It will most likely it will be flat and limp along until jobs improve, confidence returns and people start racking up debt again. "They" say debt is being repaid, but not really, new debt is not being incurred, saving rate in barely out of negative territory. Until spending goes up WITHOUT incurring new debt is when we will be in a real recovery. It could months or years, possibly more than a decade

reply to post by murfdog


Keep in mind that this debt has the implicit backing of the USA. It is really equivelant to Treasuries on a risk basis. The reason it is trading at 106 vs. 100 par is that many of these bonds were issued at higher rates then we now see in the market. Investors are willing to pay more to get a higher stream of income. At the end of the day an investor who buys a bond at par with a lower interest rate gets the same return as an investor who pays above par and gets a higher rate of interest rate.

Interest rates are at record lows. Bond prices should be at record highs.

reply to post by sligtlyskeptical


To a degree you are correct, specifically price v. yield, but 60 bps is getting on the verge of speculation. this is investor fear, mitigated by greed. Most know that the housing market isn't good, but Fannie and Freddie are "gov't" entities. So, even if their valuations are wrong they are still backed the gov't. This creates an assumed sense of security that drives the the bond price higher, which in turn reduces the yield. Making them seem safer, driving up the price, thereby reducing the yield, and so on and so on

reply to post by murfdog


Even after a 1.2 TRILLION dollar indirect BAILOUT .... the banks are STILL bankrupt!

We bought 1.2 trillion dollars worth of useless, crappy paper, and gave the money to banks, who are still unable to extend credit and manage their books.. honestly, I'm shocked.. how much printing will the financial sector need to stand on it's own two feet again?

reply to post by jacksmoke


I see the price more of a result of the interest rate enviroment rather than any speculation. Why would you buy a treasury when you get the same guarantees and a higher yield with a mortgage bond? Odds are you will see more stability in these as when the fed actually starts raising rates, things should be better and the spread will narrow between govt. mortgage bonds and treasuries.

The main risk with paying a premium for mortgage bonds is prepayment risk. In effect you may not earn the stated interest rate long enough to make up for the premium paid.

How about 20%-per-day-yield bonds, backed by the full faith and credit of Vinnie the Legbreaker?

Ye olde inflation crazytrain full-speed ahead!

[Double post...sorry...]

[edit on 6/24/10 by silent thunder]