Here Comes the Debt Pushback (Where's the Fed with the Firehose?)

Sunday, March 28, 2010 , , 5 Comments

 Bernanke wobbles but he won't fall down

Down go the dominoes. The out-of-the-loop financial media will probably blame this largely on the Fed ending its MBS program but let's be honest about the real factor behind it: remedial economics. Surprise surprise; when the market is flooded with supply with few takers, you get bond auctions like we got last week.

It had to end at some point.


For more than a year, analysts have been warning that record sized debt sales by the US Treasury were at odds with a 10-year yield sitting comfortably below 4 per cent. This week, the yield on 10-year notes jumped from 3.65 per cent to a peak of 3.92 per cent on Thursday. On Friday it was 3.87 per cent.

I'm afraid someone has to point out the obvious here: credit markets don't like getting the crack unceremoniously taken away, no more than the investors who have been buying into this ridiculousness thinking the free money will never end. Guess what? It's over.

WSJ on last week's wake-up call:

Mortgage investors got an unwelcome wake-up call last week after Treasury yields surged, a jolt that indicated that the Federal Reserve's exit from the market may not go as smoothly as thought.

As the yield on 10-year Treasury notes jumped, yields on Fannie Mae's benchmark 30-year bond followed, rising to 4.45% from 4.33%. That sent mortgage rates above 5%.

It was an unsettling surge as the Fed prepares to end its $1.25 trillion program of buying mortgage securities on Wednesday. Many in the market had come to believe the Fed's exit would have little effect on mortgage bonds. They reasoned there were enough investors hungry for extra yield that they would step in to buy once the Fed left.

Here's what I see... the skittish Fed, scared to death to let markets work out their own kinks lest they allow the cancerous bits to rot off (that might put Fannie and Freddie in an uncomfortable position), backpedals on its plan to start unloading MBSs and instead holds on to (and/or increases) its holdings to wait out the expiration of the first-time homebuyer credit in April, despite dismal numbers after the December extension. If you call 180,000 new homes dismal.

Yeah? Sounds about right.

I wonder if they have consulted with Tim Geithner on this - after all, any indigestion on the part of the housing market might not pair well with his unlimited bailout plans.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


darkcloud said...

You're right, JD, and I agree. They put these things in place to artificially stop the freefalls, and once they try to remove them, the freefalls will return.

"There is substantial risk in the removal of stimulus." [Taken from a post on my blog.]

calistaalita said...

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Anonymous said...

In marketing, it is possible to make the consumer into a "promotional junkie" where after running multiple "specials" and "limited time offers", etc., etc. you create an environment (at least for a while) where the consumer won't buy unless he or she believes they are getting some kind of "special deal" and they will wait on the sidelines until that "special deal" again arrives. You can also accidentally compress future sales into the present - sales that would have happened anyway but now won't because they've all been forced through the cattle shute in large numbers. Tax credit goes bye bye at the same time as lower interest rates? Bye Bye buyers... In reality, the consumer has been brainwashed into focusing soley upon interest rate and not upon the real issue - the size of the actual amount borrowed. They're starting to get the picture. It's going tits up. I would like to see all the mortgage backed securities bought at these ludicrous rates of return go ten toes up in value. I think that would be poetic justice.


Anonymous said...

don't know if you read Charles Hugh Smith but I like his blog

Anonymous said...

There is one way to reignite demand from legitimate, qualified house buyers: let prices drop back to pre-bubble valuations circa 1997-8. And indeed, in many less-desirable or marginal areas, prices have fallen by 75% from their bubble-era levels. In the San Francisco Bay Area (supposedly immune to declines in value), there are multiple zip codes which have seen declines of 70+%, and many more which have experienced drops of 40% or more: Pinpointing home prices by ZIP code (S.F. Chronicle). But drops of these magnitudes essentially bankrupt lenders and wipe out whatever equity the home buyers invested in the property. Those stupendous losses have yet to be fully tallied (due to the accounting tricks noted above) for either borrowers or lenders, but it is clear that as a nation the ability to borrow/lend $3 trillion a year by any prudent metrics of qualification is gone.