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Monday, March 10, 2008

So Many Margin Calls, So Little Time

I am not enjoying this. In the wake of Bearnanny's call for the lienholders to start writing mortgage principal balances down far enough so that the borrowers would have equity, virtually the entire agency bond market has locked up. This does not surprise me. Munis are sucking up the available money, and when a top government official basically calls for handing equity declines wholesale to the investors, a less then enthusiastic response from investors is to be expected.

You can pull this type of crap safely when you are a college professor, but not when you are the Fed Chair.

The bottom line now is that Thornburg's situation has now propagated into funds that invest in agency paper. How special!

Furthermore, his proposal was stupid to begin with. You cannot shore up spec loans this way. There are times when it would be the best tactic, but that usually occurs when one is allowing a short refi, so the lienholder gets his or her money back. There's no point at all to doing it and letting the lienholder live there in most cases.

As things now stand, a lot of the agency paper is a good buy, but the munis are as well; Continued margin calls by banks to leveraged funds are drawing money out of the buyers. In the end, the small fish will step up to the plate, just as they have with munis.

Comments:
M.O.M.,

I haven't seen evidence of a flight to muni's. Can you cite any support of such a flight?
 
MAB, they are being bought by income investors like insurance cos and smaller income-oriented/heavily taxed investors. In this environment, you can get great yields at pretty low risk. That is killing MBS.

At the same time, some of the hedge funds had been leveraging munis and hedging by shorting treasuries, and they are soOOOOOOOOO screwed right now.

Now that the hedgies are beginning to bust, I bet we see wholesale liquidations. report of one.

Bad quality munis are dead on the market. There's some pretty good stuff out there that rolled out of ARS, etc, and is paying well.

The muni market is huge, but it is split into two portions. One is the income portion, and another is the leveraged market.

This is a fascinating debacle. I doubt it will end soon, and it bids fair to cut the agency MBS market to shreds.

The net effect on stocks if this continues for long is going to be adverse, because individual high-income investors can now do a lot better by pulling money out of equities and putting it into tax-free munis.
 
WSJ suggested this morning that some big investors are buying munis on speculation that an Obama/Clinton tax plan might pass...obviously, an increase in cap gains and dividend taxes would make tax-free munis more attractive.
 
M.O.M., David,

I discount the daily "news" reports heavily. It's generally just backround noise.

As for muni's (yoy & ytd), the short end is up modestly, the intermediate issues are flat and the long issues are DOWN.

I was looking for numbers as support.
 
I think Bernanke Panicked.
 
If Bernanke is going to throw money out of helicopters shouldn't it be his money? There is going to be a knock on effect from his statement even if the mortgage plan isn't implemented now.

Chatting up my local banker, he stated that mortgage rates were up .5 per cent in one week. Everyone in the mortgage business is going to allow for risk of intervention in their contracts (What does a contract mean anymore?) even if there is no action on this whack plan now.
 
MAB - just look at how quickly CA was able to find buyers for their new offerings even after it dumped insurance. Most of them are the smaller outfits too. The muni/treasury spread is very high. I think the stuff rolling out of the ARS and variable markets is the best opportunity. Naturally everyone's trying to roll these out of fixed longs ASAP. Try This Bloomberg article:
The average rate for bonds whose interest is set at auctions every seven days was 6.52 percent Feb. 27, up from 3.92 percent on Jan. 30, according to a Securities Industry and Financial Markets Association index.

Anon - I think BearNanny panicked too. Fine, everyone's got the right to panic. Just don't do it publicly.

Fred - yup. And other market disturbances. Nothing worse than selling the mortgages you've been writing for the last two months at a loss.
 
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