Tuesday, October 14, 2008

Mortgage Rates Soar as the Bond Market Awakens

Good Afternoon Folks!

Been a busy week. Sorry I couldn't hop on sooner. Well, well, well, lets take a look at mortgage rates from Bankrate.com since Paulson began his spending binge:

Quick Take:

Think the bond market likes the bailout? Treasuries were down even further today, so expect mortgage rates to rise further tomorrow. As I have explained before, when the yields rise on treasuries, so do mortgage rates.

These are the "unintended consequences" that Paulson and Bernanke refuse to consider when they decide to spend hundreds of billion of dollars via bailouts. Both of these clowns should be replaced. They are a disgrace. The $250 billion that Paulson gave to the banks today was sickening.

This was basically a $250 billion handout. The US taxpayers got no common or preferred stock in return for bailing them out. England got it right this weekend when they gave their taxpayers both common and preferred stock in addition to forcing the banks to eliminate all of their dividends. As a result, the Brits taxpayers now have a chance to get their money bank in the future when the banks recover. The US taxpayer gets stuck holding the bag as our pigmen laugh all the way to the bank.

Paulson is a crook and a sham and should be removed. The arrogance of the pigmen and the government in the handling of this situation is really beyond belief. I am flabbergasted. When this fails, expect pitchforks and torches in DC.

I wonder what Paulson is going to do now that mortgage rates are starting to soar as the bond market tells him to pound sand?

The housing market is what put us into this mess, and his spending solution has resulted in making housing even MORE unaffordable. Paulsons bailouts are actually making the problem he is trying to solve WORSE. Nice job there Skeletor. The only winners here are Paulsons banking buddies who walk away with another $250 billion of our money.

The rise in mortgage rates will continue to put further pressure on housing prices. This will result in further pressure on the banks, and a deeper recession. Paulson needs to realize that we can't reflate the bubble by throwing money at this problem. There are repercussions when you spend like Paris Hilton in a Saks Fifth Ave.

Here is another unintended consequence:

"Oct. 14 (Bloomberg) -- Yields on Fannie Mae and Freddie Mac corporate debt rose to records relative to Treasuries as the government said it would guarantee borrowing by banks, providing bond buyers with competing U.S.-backed investments.

The difference between yields on Washington-based Fannie's five-year debt and similar-maturity Treasuries rose 15.8 basis points to 118.2 basis points as of 3:35 p.m. in New York, according to data complied by Bloomberg.

As part of U.S. plans announced today to halt a credit freeze, the Federal Deposit Insurance Corp. will fully guarantee newly issued, senior unsecured debt from some banks. The bank notes initially will probably carry yields greater than those on Fannie and Freddie's $1.7 trillion of debt, reducing demand for so-called agency bonds, said Jim Vogel, an analyst at FTN Financial Group.

Investors may also be concerned that an increase in supply of Fannie and Freddie debt may hit the market, following reports that the U.S. has directed the companies to buy $40 billion a month of subprime and Alt-A mortgage securities, Cloud said.

The difference between yields on McLean, Virginia-based Freddie's five-year debt and similar-maturity Treasuries rose 18.1 basis points to 124.2 basis points."

Final Take:

Gee, Why are Fannie spreads continuing to widen after the mother of all bailouts? If we just finished guaranteeing every debt in America, spreads should be coming in shouldn't they?

The answer here is investors aren't buying it. There is only so much money to go around unless you print folks. When its all said and done, The government simply won't have the money to absorb all of the additional consumer and bank losses that will continue to add up as the recession deepens. Don't think the bond market doesn't understand this.

This is why treasury demand is dropping, and spreads are widening or holding firm in many areas of the credit market. If spreads continue to not respond to this massive financial stimulus, equities are going to tumble.

Lets not forget about the rapidly vanishing economy on top of the credit problem. Take a look at Pepsi and Microsoft today:

"Oct. 14 (Bloomberg) -- U.S. stocks fell a day after the market's biggest rally since the 1930s as a worsening outlook for earnings forced investors to look beyond a $2 trillion global push to rescue banks.

PepsiCo Inc. lost 12 percent, the most since 1982, after lowering its profit forecast as customers cut back on snacks and soft drinks. Microsoft Corp. and Intel Corp. slid more than 5 percent as analysts said demand for computers is slowing."

Pepsi was an eye opener! It looks like the consumer can't even to afford to buy a bottle of cola now let alone a house!

Bottom Line:

Stocks retreated after an insane bounce yesterday. I put a little short on TWM this morning and held it through the close. I am still remaining relatively flat as a board from a trading perspective. (CHK) is one long I am keeping my eye on although I haven't pulled the trigger. This is a nice energy play and its behaving nicely this week.

I see nothing bullish about the economy folks. The jump in mortgage rates is very alarming. I simply see now way out of this mess. Its going to take a lot of pain and sacrifice for this country to get through this, and the quicker Paulson accepts this the better. These bailouts do nothing but prolong the agony. I would prefer to rip the band aid off all at once and get it over with versus sitting here and suffering.

The bond market was fairly well behaved today considering the news. However, the long term trend on treasury demand is declining. Bond market moves don't all take place in one day. I focus more on trends here versus one day moves unless they are huge like the one I showed you last week.

This drop in treasuries does not bode well for the housing market folks. Treasuries down=yields up=higher mortgage rates. Remember this equation if you are house shopping.

There are two areas to focus on short term: The credit markets, and corporate earnings. If the credit market continues to be locked up, the market is going to suffer.


teddy bear said...

one more equation seems to be ...

ARM reset=US Economy reset



Jeff said...


I love that arm reset chart. More pain to come.

Check this out. Now we have states going bankrupt. Can Rhode Island get a bailout?

"NEW YORK, Oct 14, 2008 (BUSINESS WIRE) -- Fitch Ratings downgrades the rating of about $1 billion Rhode Island and Providence Plantations (the state) general obligation (GO) bonds to 'AA-' from 'AA' and removes the rating from Rating Watch Negative. Fitch also downgrades to 'A+' from 'AA-' and removes from Rating Watch Negative the ratings on the state appropriation-backed bonds listed at the end of this release. The downgrade reflects continued economic and revenue weakness that has further strained state finances. The Rating Outlook is Stable.
Rhode Island's recent economic performance has been amongst the weakest of the states. The state has one of the most stressed real estate markets in the country, fueled by subprime delinquencies, and has lost jobs every month since August 2007. August 2008 employment was 2.6% below August 2007, compared to the nation's loss of 0.2%, with declines in almost every sector. Unemployment in August 2008 stood at 8.5%, 139% of the U.S. rate. The pace of personal income growth also has been below that of the nation; 2007 personal income per capita equals 103% of the U.S."


ZMonet said...

Looking at the chart, it looks like majority of the ARM resets have already occurred and we are actually at the middle low part in the progression. The issue will become whether rates like LIBOR, which many of the ARM loan resets are based off of, can be brought down prior to the next large uptick.

I think tomorrow will be an interesting day in the market. If we don't go up tomorrow, I don't know what will move this market up in the short term. Certainly there isn't going to be earnings news that is especially good and it looks like the credit market has some time before any thaw begins. If we were somehow to break through 8000 again on the way down, I think all consumer confidence would be blown out again...and this time how much more can the government do. The entire thing is sad and scary.

Jeff said...


I agree.

Something happened tonight. I don't know what it was, but the futures tanked all at once about 19handles. It was a knee jerk reaction to some type of news. I am sure we will find out tomorrow.

Futures have the S&P down 15 and the DOW down around 122.

Expect a lower opening. I wouldn't be surprised to see another leg down tomorrow.

It seems like the bailout news has already lost its luster, and the earnings news has been bad. Intel missed tonight although the market didn't react negatively after the news.

Jeff said...

Treasury yields up when the market is down.

Retail sales were terrible thiis morning

Not a good combo folks. Trend is lower, keep an eye on the 10-year.

Down 200 at the start. I will be on early this afternoon with an update.

Anonymous said...

Having Paulson in there making all these decision is like asking the mafia to help you fight crime. Yes the mafia knows a lot about crime - but they are going to pretend to help you while they game the system so they can get away with even more crime.

Jeff said...


Right on!

Paulson is a pig. It looks like the market is rejecting his last wave of "criminal" bailouts.

I think the country has little to no faith in this guy based on the market reaction to the bailout this week.

The sheeple are starting to wake up and realize this guy is nothing but a crook.

Avl Guy said...

It's 1:53 pm and the Dow is down 481.
If we once again get another turnaround around 2:45-3:15 pm, we need to call an SEC investigation, cuz it smells of market manipulation.
Is there a single 'rule' left that's sacrosanct, or is everything expendable in the name of 'saving the financial system'?

Avl Guy said...

BTW, CalculatedRisk blogged that JPMChase's Jamie Dimon is rumored to be Obama's choice for Treasury Secretary.
Oh brother.
Jamie was CEO in Chicago at BankOne (b4 departing & B4 Chase acquired it); his first job after being booted out of Citi by Sandy. I guess while in ChiTown, he hooked up with Obama or his political strategist, David Axelrod.

Hope this is just BS, we dont need more pig men in Treasury .