Today, new found short
term stock market optimism resulted in the Treasury market selling off and MBS prices
cheapening up a few ticks. A few lenders repriced for the worse....
Since 5pm "Going Out" Marks....
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Since late March, when a three week stock market rally lost steam, equity
markets have been searching for government hints regarding the REAL
financial status of the major market participants
of the US banking system. Rapid job losses
and record government
spending have even begun to overshadow the initial confidence that
resulted from the Obama
Administration's release of its plan to save the world. Today Treasury
Secretary Geithner touched on a topic that struck the nerve of stock market sensitivities....he made one of those "headline news" statements that
moved money....
"Currently, the vast majority of banks have more
capital than they need to be considered well capitalized by their
regulators"
Those comments
combined with several other "toxic asset" /balance sheet friendly
statements sent financial stocks on a mid morning run that never turned
back...and unfortunately flows moved out of the Treasury market and yields
rose...
...which gave MBS coupons downward "directional
guidance" for the day.
Geithner didnt have much juicy content in his prepared
testimony. The prepared text was intended to add
transparency on the Treasury's expectations regarding the use of the
remaining $135.6bn in TARP funds.
Out of the $700bn allocated to Treasury
through TARP... $117.4bn has been used to recapitalize banks like Citigroup and
Bank of America, and auto companies like Chrysler and GM....a good portion went
to insurance giant AIG. All of which had good use though...even if just as a
psychological support system. I know many will mutter under their breath here
but I feel it is important to point out that the failure of Lehman
Brothers led to an exponential "worsening" of financial and economic conditions...
not to mention the further deterioration of the already battered mindset of
consumers and investors.
And remember that since the failure of Lehman Bros. the Fed's
balance sheet has grown from $946 billion to over $2 trillion (more than double
in less than a year).....and....the labor market has still shed in excess of $4
million jobs....all since the failure of Lehman Bros...less than a year
ago! I ask: what would haveresulted from the failure of another "to big to fail"bank? Perhaps the early arrival of the end of the Mayan
calendar? Who knows but things would be considerably worse if
capital injections were not made directly into the financial and banking
system by the US Government.
Geithner then went on to outline the expected use of the
remaining TARP funds...
1. More relief to financial institutions and auto makers .2.
The Capital Purchase Program (CPP). About $218bn for CPP. (http://ustreas.gov/press/releases/hp1207.htm)
3. Housing Related Programs will get at least $50bn...with another $25bn
available. 4. Programs to promote Consumer and Business Lending (TALF)...$95bn.
5. $100bn for the Public Private
Investment Program (PPIP/Geithner's Legacy Asset Plan).
Following the sell off of TSYs, MBS showed some resiliency but mortgage
prices caved to the selling pressure late in the afternoon (see chart). I know you dont
like to see red because it gives lenders (who mostly already locked: READ MORE)
the option to adjust pricing to current market. But there is a positive one can
take from today's MBS session...and its an "ol faithful" type of positive. As rates sold off (TSYs selling) and the yield
curve steepened up a few bps...MBS yields and prices were resistant to the selling
pressure (that was imposed by Treasury selling)...a behavior that has been consistent during the time the Federal Reserve has participated in the mortgage market. So we take some solace in the fact that, for the day,"rate sheet influential" MBS coupons outperformed their "relative
value" benchmark (MBS/TSY yield
spreads tightened up).
Yes I know...the RED meant REPRICES...but dont forget that MBS coupons are still quite "rich" and in order for non-Federal Reserve market
participants to "want to" or even "be able to" move their MBS positions "down in
coupon", will require that the current
rich/expensive prices of MBS coupons cheapen up a few ticks. PLUS originators will have to start
ramping up production of new loans (because real money and levered MBS investors dont want to get stuck in an
expensive coupon that is exposed to extension risk: READ MORE ABOUT CONVEXITY AND EXTENSION RISK).
Data Releases Tomorrow...
- The IMF will release its World Outlook Report
- At 7AM the Mortgage Bankers Association will report "Weekly Mortgage Applications". Lenders have been passing through MBS price gains over the past few days so we suspect a few borrowers jumped off the fence...we dont know how many of those borrowers are new applications though....did you take more new applications this week?
- At 9AM the FHFA Monthly Home Price Index report will be released by the US Government.
- Treasury Secretary will be on Capitol Hill again giving more insight into government spending programs.
- and Wells Fargo announces earnings ....
Also Tomorrow : The MBS trend
channel has been narrowing and is nearng a price point that will require new direction.Matt and I take another look at long term MBS
price trends and their implications on your rate sheets.