The Impact of Global Capital Flows and Foreign Financing on U.S. Mortgage and Treasury Rates

It looks like after two months of ignoring the risks that remain for the economy and markets, Wall Street has finally found something else to worry about: the possibility that the United States could lose its AAA credit rating.

The Federal Reserve will probably slow its rate of mortgage-backed securities purchases this year to make room for private investors balking at the most expensive levels for MBS since 1992, according to Credit Suisse on Thursday.

The failure of BankUnited, FSB is the largest banking collapse of 2009 and marks the 34th FDIC insured bank to be added to the Failed Bank List.

NEW YORK (Reuters) - Bill Gross, manager of the world's biggest bond fund, warned on Thursday the United States will eventually lose its top AAA credit rating, a fear that had already spooked financial markets on Thursday and could keep the dollar, stocks and bonds under heavy selling pressure.

Carlos Carvalho, Nicholas Klagge, and Emanuel Moench. The Persistent Effects of a False News Shock. Federal Reserve Bank of New York Staff Reports Staff Report Number 374, May 2009.

MORTGAGE RATES FLAT THIS WEEK THANKS MAINLY TO ACTIONS BY TREASURY AND THE FED McLean, VA - Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 4.82 percent with an average 0.7 point for the week ending May 21, 2009, down from last week when it averaged 4.86 percent. Last year at this time, the 30-year FRM averaged 5.98 percent. The 15-year FRM this week averaged 4.50 percent with an average 0.7 point, down from last week when it averaged 4.52 percent. A year ago at this time, the 15-year FRM averaged 5.55 percent. Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 4.79 percent this week, with an average 0.6 point, down from last week when it averaged 4.82 percent. A year ago, the 5-year ARM averaged 5.61 percent. One-year Treasury-indexed ARMs averaged 4.82 percent this week with an average 0.6 point, up from last week when it averaged 4.71 percent. At this time last year, the 1-year ARM averaged 5.24 percent. (Average commitment rates should be reported along with average fees and points to reflect the total cost of obtaining the mortgage.) "Long-term fixed-rate mortgage rates have remained below 5.0 percent for the past 10 weeks as the U.S. Treasury and Federal Reserve (Fed) act to keep interest rates low through security purchases," said Frank Nothaft, Freddie Mac vice president and chief economist. "The Treasury purchased $136 billion in mortgage-backed securities through April and the Fed bought $740 billion through mid-May. In addition, the Fed purchased $115 billion in Treasury bonds since March of this year. "Housing construction continued to decline, as total starts fell to the lowest level since the Census Bureau began its monthly series in January 1959. While single-family construction appears to be near or at a bottom, multi-unit construction continued to recede. Reflecting the apparent stabilization in...

May 21, 2009 TG-142 U.S. Treasury Secretary Geithner to Attend G-8 Meeting of Finance Ministers in Lecce, Italy, June 12 -13 WASHINGTON – The U.S. Department of the Treasury today announced that Treasury Secretary Geithner will travel to Lecce, Italy to attend the G-8 Meeting of Finance Ministers June 12 – 13, 2009. Additional details regarding Secretary Geithner's schedule will be available in the days ahead. Media requesting to travel with Secretary Geithner must send the following information to Frances Anderson in the Office of Public Affairs at : full name, news organization, passport number and country of issue. Requests to travel with the Secretary must be submitted via email by NOON ET on Friday, May 29, 2009. Space is extremely limited; Treasury cannot guarantee that all requests will be accommodated. Currently, press opportunities are scheduled for Saturday, June 13, 2009 only, including pooled media opportunities for the meeting and a press conference to follow. Additional details will be announced by the Government of Italy. Hotel accommodations will be made through the Office of Public Affairs in conjunction with the U.S. consulate in Naples; costs will be incurred by each media organization. Please include name(s), credit card information and anticipated dates of travel with your request. Media credentials : Online registration is available at . PLEASE NOTE: THE APPLICATION DEADLINE IS MONDAY, JUNE 1, 2009. ###

Congressional Budget Office director Douglas Elmendorf , in , backs the most pessimistic forecasts for joblessness — expecting the unemployment rate to top 10% next year. While the economy will resume growth in the second half of this year, “the hardships caused by the recession will persist for some time,” he says. The GDP gap is the difference between real (inflation-adjusted) gross domestic product and its estimated potential level (which corresponds to a high level of use of labor and capital resources). How much time is some time? The CBO’s most recent forecast shows that the economy’s output gap — the difference between its actual and potential output — will average 7% of gross domestic product (about $1 trillion) this year and next year. And that output gap will not close until 2013. The current recession, already the longest since World War II, isn’t quite as deep as some the severe downturns since the Great Depression when measured by the sharpest declines in GDP. But when the CBO releases its next forecast in August, Elmendorf says, it’s likely to show even larger shortfalls in output in the coming years than previously estimated. “By this measure, the current recession and its aftermath will be the most severe economic downturn of the postwar period.”

A once-glittering business loses its shine CREDIT-CARD borrowers who roll over a portion of their balance each month are known as revolvers. These days lenders are in a spin as they struggle to cope with write-offs, a regulatory crackdown and changes in consumer behaviour. On May 18th American Express, a credit- and charge-card giant, announced a second round of job cuts (bringing the total to 11,000), slashed its marketing and business-development budgets and offered a “very cautious” outlook. A few days earlier Advanta, a provider of cards to small businesses, froze all existing accounts after charge-offs (uncollectable debt) reached a dizzying 20%. The shutdown sent a shiver through the market for bonds backed by credit-card debt, which is only now starting to recover from the ravaging securitised assets took last year. ...

Economists are warning bond investors not to get carried away by news the Federal Reserve is thinking about boosting its future purchases of Treasury and mortgage debt. Right now, the central bank is embarked on a radical effort to lower borrowing costs in mortgages and other lending markets by purchasing $300 billion in Treasury debt. It’s buying considerably more in the mortgage and agency markets. These large purchases of debt have forced yields and mortgage lending rates down and have largely done what policy makers wanted. But investors hope the Fed would do even more, especially as Treasury yields, facing massive government borrowing, have ground higher over recent months. Some investors saw in the meeting minutes for the late April gathering, released Wednesday, signs their hopes will be soon realized. The document said some FOMC members “noted that a further increase in the total amount of purchases might well be warranted.” That said, for now “all members concurred with waiting to see how the economy and financial conditions respond” before shifting policy. Bond yields moved lower on the news, with longer-term yields sliding by around six basis points, as investors cheered the possibility of additional Fed intervention in the future. Fed watchers countered that should be about all investors do with the Fed minutes. Whether the central bank will or won’t be buying Treasurys beyond what it’s already committed to is a decision that will be made some time from now, on conditions that will be hard to know. The current program runs until September. To be sure, some think it’s a good idea. Ward McCarthy , a bond strategist with Stone & McCarthy Research Associates , said more purchases is “something they should consider” because what’s been done so far has been “helpful.” The evidence for success is strongest in mortgage related buying, because borrowing rates for homes have indeed come down, McCarthy said. He calls success in Treasurys more “elusive” but notes...

Government debt prices rose Thursday as investors await the next buyback by the Federal Reserve and digested the central bank's gloomy economic outlook.

submits: As a result of the seemingly endless decline in the U.S. housing market (we're nearing the three year mark for the current downturn), most on the market have been posted huge losses since 2007, with many still down more than 50% from their record highs despite recent rallies. But as any shrewd investor knows, crisis begets opportunity. With real estate ETFs reaching new lows, the time may finally be right to snatch up some funds at bargain prices.

A roundup of economic news from around the Web. Yves Smith comments on former Fed Chairman Alan Greenspan’s that banks will need large amounts of capital. “You have to give former Fed chairman Alan Greenspan credit for having no shame. Well, he did once look a bit rattled before Congress for about five minutes and ‘fessed up it never occurred to him that people would be so greedy as to pull so much cash out of companies so as to leave burned hulks in their wake. Did he utterly miss reading the news during Enron and the 2002 accounting scandals? Greenspan also made life difficult for Bernanke in early 2007 more than once. Indeed, prior to Greenspan, no former Fed chairman made frequent pronouncements. This is unseemly, but having a sense of propriety went out of fashion in America some time ago. Now Greenspan is saying the banks are not OK (if they need a lot more capital, then by definition, they are undercapitalized now) when the powers that be have a full court press on to present precisely that image. And whose responsibility might it be that the banks are in such sorry shape? Might the Greenspan Fed’s extreme laissez faire stance have had a wee bit to do with it?” Via , Matthew Padilla of the OC Register looks at new estimate for mortgage recasts. “The older chart shows a big peak in 2010 — about $40 to $45 billion a month in loans around September/October 2010. The newer chart pushes that peak about one year into the future into late 2011/beginning 2012. Some borrowers will hold on a little longer. Maybe the housing market will recover by 2012 and they can sell to avoid foreclosure. But if any of these borrowers are deferring principal and interest owed, reaching say a maximum of 125% on a loan amount on 2005 to 2007 prices, then it is much less likely home prices will have rebounded enough to save them by 2011 or 2012.” On her blog, Megan McArdle has some quick comments about the changes to the CAFE standards. “What to say, beyond the obvious, about the administration...

submits: In his first note released in the post Sakwa world, Craig Schmidt continues to attempt to restore confidence in retail REITs. It would, after all, seem prudent to bang clients' heads into their desks until they see the light at the end of the tunnel (oncoming bullet train?) at a time when the only cash, and equity value, REITs can create is by raising expensive, dilutive equity in order to repay the cheapest form of capital (that of secured loans previously held by Mr. Schmidt uber parent, Bank of America). This is especially true, after these same clients have plunked down about $20 billion in new equity in companies that at this point exist on fumes of hope, speculation and short covering. not surprisingly, the report comes just prior to Realtors's release which indicates that Commercial Real Estate activity in Q1 fell 4.8% from Q4 of 2008 and 12.9% year over year, while vacancy rates are poised to rise to 12.1% from 9.7% last year. While the title is expected, even Mr. Schmidt is at a loss to present the REIT "green shoots" that would substantiate his note. Amsuingly, Schmidt quotes favorable restaurant trends to back up the stabilization thesis:

In conjunction with the April 28-29, 2009, FOMC meeting, the members of the Board of Governors and the presidents of the Federal Reserve Banks, all of whom participate in deliberations of the FOMC, submitted projections for output growth, unemployment, and inflation in 2009, 2010, 2011, and over the longer run

There may be green shoots appearing for the economy, but to much of the Federal Reserve they appeared to be light green. Central bank officials in recent months grew more pessimistic about their prospects for the economy, expecting a worse 2009 and 2010 than they forecast in January. , provided for the April 28-29 Federal Open Market Committee meeting, show central bankers getting closer to private economists’ expectations for the unemployment rate. The central tendency of the forecasts (excluding the three highest and three lowest among 17 policymakers) puts the unemployment rate at between 9.2% and 9.6% in the fourth quarter, down from the earlier projection of 8.5% to 8.8% made in January. The fourth-quarter 2010 forecast worsened to 9% to 9.5%, compared with a projection of 8% to 8.3% submitted in January. Even the 2011 forecast went up a full percentage point to between 7.7% and 8.5% in the fourth quarter of that year. Fed officials still expect a recovery in sales and production to begin in the second half of this year, but the forces weighing on the economy were “likely to abate only slowly,” a summary released with the minutes said. Gross domestic product was projected to decline by 1.3% to 2% in the fourth quarter of 2009 from the year-earlier period, worse than the January projection of a decline between 0.5% and 1.3%. The forecast for 2010 was also downgraded a bit: the central tendency projection is now 2% to 3% growth, down from the January forecast of 2.5% to 3.3% for 2010. The Fed said officials expected that “recoveries in consumer spending and residential investment initially would be damped by further deterioration in labor markets, still-tight credit conditions, and a continuing, if less pronounced, decline in house prices. Moreover, they anticipated that very low capacity utilization, sluggish growth in sales, and the high cost and limited availability of financing would contribute to further weakness in business fixed investment this year.” Projections...

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submits: Edmund Andrews’ in the NYT ended with the following line: Eight months after my last payment to the bank, I am still waiting for the ax to fall.