Monday, June 8, 2009

MBS Collapse!

Good Evening Folks!

Stocks were down much of the day before making a huge comeback heading into the close after Paul Krugman called for the recession to be over by September. Good luck with that call Paul! Sold to you!!!!

The way I see it: Today was the calm before the storm. The fireworks really begin on Wednesday and Thursday when the 10 and 30 year auctions are held respectively. The auction details will be announced at 1pm on both days. Make sure you catch Rick Santelli for the announcements. I expect them to be huge market movers one way or the other.

If the auctions go well we could see a big pump. If the tails are huge or god forbid we see a failed auction, I think an equity crash is possible.

MBS Disaster

There were some fireworks in the credit markets today but it had nothing to do with treasuries. MBS(mortgage backed securities) continued to totally collapse. The move today was stunning:

Here is the longer term trend on the FNMA 30 year coupon:

My Take:

Basically what these charts tell you folks is mortgage rates are soaring. The FNMA is the 30 year coupon which is the benchmark from which mortgage rates are set. Like treasuries, the yield is inverse to the chart: The lower The FNMA drops , the higher the yield. Word on the street is rate sheets have had to be updated and increased 2-3 times a day in order to keep up with the collapsing MBS markets.

Moves like this have never been seen before! Not even back in Sept/Oct. when we were on the brink of a financial meltdown. If you look at the first chart above, we saw a -31/32 drop in the FNMA today which equates to almost a full basis point increase on mortgage rates in one day alone!

Mortgage rates by the end of the day at one outfit today were 5.875%.

Bottom Line:

This of course is BB's worse nightmare. The Fed in my view has completely lost control of the bond market. Mortgage rates are soaring despite the massive purchases of MBS's by the Fed. This trend will end up imploding the housing market and the bank's balance sheets if it continues. These moves in MBS are parabolic folks!

Remember, the Fed has promised to buy over $1 trillion dollars of MBS's versus the mere $300 billion that the Fed has allocated for buying treasuries via QE.

The bond market is basically giving Ben one giant middle finger at this point by selling off both. They are screaming: BRING IT ON BEN!

I can't wait to hear the next Fed statement scheduled for later this month. I am sure they are absolutely panicked by what is going on in the bond market. I think the boys in Chicago have had enough of Ben's bullshit.

The Fed is in a real tight spot right now. I personally don't see a way out. If the Fed decides to jump in with more buying of MBS's and treasuries, the bond market may tell Ben to go pound sand and continue to take yields higher. If this happens Ben's screwed and he knows it. If he does nothing and rates keep rising he is pretty much in the same predicament. I wouldn't want to be in his shoes!

The short end of the treasury yield curve also continued to move higher today. This flattening of the 2 year versus 10 year on the yield curve is huge negative for stocks. This puts a nice squeeze on the banker's profits because borrowing short and lending long becomes less profitable as the spreads flatten.

If the MBS action today is in any way indicative of how the bond market is feeling this week, we could be in deep trouble when the treasury auctions hit later this week.

Stay Tuned!


CT-Hilltopper said...

I think both you and Karl are on the same track today.

We have painted ourselves into a corner. Like I said before, if we don't blow it on this week's auctions, it will be one of the next ones. The thing is to be prepared for anything at any time.

The important fact to keep in mind is that our government has done nothing to show the other countries in this world that they have learned anything from this whole mess. The only thing that they have shown is that there are lobbyists and people that put them into office that must be paid off.

This is the "change" that people voted for? Please excuse me while I gag. Democrats. Republicans, it really doesn't make any difference. To get elected, you have to sell your soul, mortgage your family, and prostitute your values...and in the end there is nothing left. That's one of the reasons why we are where we are today.

Anonymous said...

The level of corruption in the government here is no difference than where I came from (Vietnam). Does it really matter anymore if the country is communist, socialist or capitalist? Seems to me the ruling (rich) class always steal from everyone else under their powers.

Anonymous said...


When Obama talked about the "change", he meant that it is the Democrat turn to screw the taxpayers. That is the "change" from being screwed by the Republican party.

Jeff said...


I have always thought that our arrogance, corruption, and lack of values in response to this crisis would be the key things that took us down.

We thought we could print as much money that was needed thinking that the there would be no doubt that the world would fund it without a second thought.

America is about to learn a very big lesson

Jeff said...



We now have oligarchs just like many other countries in the world do. Many of them have third world living standards.

We used to have the rule of law that protected the middle class. Thats long gone now.

The deregulation of Wall St allowed that bankers to step in and steal everyone's money.

I'm sorry you had to see the same thing happen here. Hopefully we find a hero that allows us to take our country back and establish the values of which made it such a great place to live.

Jeff said...


I don't even think there are two parites anymore. They are all one in the same to me these days.

Its time for a third party that doesn't have to cater to the lobbyists's that CT talks about.

It will be interesting to see how this all plays out. The bond market is totally pissed. Thats's a good thing in my eyes.

Watching all of this shit sell off gives me hope that we can stop this madness.

Lets watch the auctions later this week. America might get a big boot up its ass this week.

Jeff said...


Wow that is quite a powerful post from Karl.

I always get nervous when he sounds like that because he usually is right.

I guess we all have some serious thinking to do.

BAM said...

Another great post today. Thank you! You are right. MBS was interesting tonight. I am almost hoping that the bond auction will fail so that we are forced to cut back our spending. I think it will be easier if we face the music sooner than later. We've already kicked the can down the road further than we should have.

Either way, it will be interesting couple of weeks. Cheers!

Jeff said...


I hear ya!

I am looking forward to the same. Lets just get it over with.

Attempting to reflate a debt bubble is totally ridiculous. It can't happen.

Lets get through the pain so that we can begin to recover and see real green shoots.

We must rid ourselves of our debts before this can happen. Hiding them via fraudulent accounting will not solve the problem.

One of these times we are gonna kick the can and learn thats its filled with cement.

Jeff said...


A little futures update.

ES has been slowly sliding into the red. We are now sitting at -4.25 after being in the green earlier.

Many of the world markets are down tonight.

Tomorrow should be interesting!

BAM said...

Go FAZ!!!

As I was getting my daily dose of real news from various blog sites, I started wondering how much of a role the internet is playing today's economy. The speed of news spread is almost instantaneous and it has become much more dynamic. Do you think we would have had the same results without the internet when the only game in town is mass media outlets controlled by pundits? Just a thought.... Anyway, thank God for the internet. Power to the people has real meaning now!

Jeff said...


Here is some FAZ bear porn for you to enjoy:

"WASHINGTON (AP) -- A government test of whether 19 major banks could survive a further downturn in the economy may have relied on too rosy a scenario and should be repeated, independent investigators say.

In a report released Tuesday, the Congressional Oversight Panel for the government's $700 billion financial rescue effort found that the Federal Reserve used a "conservative and reasonable" approach to assessing the health of the nation's biggest banks.

But, the panel added, the Fed's worst-case scenario does not go far enough. For example, the "stress tests" conducted by the Fed were based on the 2009 unemployment rate average of 8.9 percent. Unemployment in May climbed to 9.4 percent.

"While no one should gainsay the potentially positive results of the tests, it would be equally unwise to think that those results reflect a diagnosis of all of the potential weaknesses or create a necessarily sufficient buffer against future reverses for the banking system," the panel wrote.

Elizabeth Warren, the Harvard University law professor who heads the panel, was expected to testify on Tuesday on the group's findings before the Joint Economic Committee."

Jeff said...

Post up around 6:30

CT-Hilltopper said...

Here's a post from Jesse's blog basically preparing us for the same thing.

The front end is teaching people about money. He does this really well. So do you, Jeff. That's one of the reasons I read your blog and his. You make finance seem so uncomplicated. LOL

After he talks about money, how fiat currency operates, he ends with a chart showing the debt that foreign governments have bought up to keep us operating.

Then he says basically that "it's coming".

I don't know about you, Jeff, but I'm getting a really bad feeling about those long term bond auctions. If it's not this'll be the next sale. There's only so many times you can kick the can down the road.

There's too many people that I respect saying the same thing at the same I can feel it myself.

Most people just have no idea what's coming. It's going to just blow their minds.

We didn't need a foreign country to destroy us. We dug our own hole. I just hope theres enough good and decent people out there to get this country through what's coming. We already know we can't depend on the government for anything.

CT-Hilltopper said...

Oops...forgot the link to the blog I referenced in the previous post. Sorry.

Jeff said...



I love Jesse. I agree. If it doesn't happen this week it will down the road.

Even if they do go well, equities will underperform as a result. I just put up a new post.

Thanks for sharing!

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