Nov 18. Underlying collateral behind treasuries is…student loans?!?!
–Late Thursday Moody’s downgraded several banks, GS, JPM, MS…yet on Friday the first two rose and MS was unchanged, swept up in the euphoria of new highs in stock indices. In euro$’s there was an early large (20k) buyer of blue Dec 9812c covered, synthetically bought the straddle for 23.5, yet it settled 22.5 (position was exit, open interest in calls fell 8k). Swap spreads made multi year lows Friday with the 5 year at just 10 bps (had been above 20 mid-year). The VIX fell and sits just over the low for the year around 12. Interest rate futures were nearly unchanged. All of the above is a reflection of complacency, in support of the “lower for longer” viewpoint, which the Fed has taken pains to communicate, resulting in reach for yield and risk. But I wonder if the time is coming when even treasuries start to lose their risk free luster. For example, I looked at Consumer Credit data, which continued to show negative yoy change in the revolving category of -2.9% yoy (for Sept). Yet the pace of total consumer credit is around 6%, all due to non-revolving auto and student loans. That is, government guaranteed student loans. Amazingly enough, of the $3 T total consumer debt, 23.7% ($716B) is held by the Fed’l gov’t. In 2008 that number was 5% ($135B), followed by 8.7, 13.4, 17.6 and 21.1%. As a point of comparison, consumer credit is about 1/3rd of total mortgage debt ($9.3T). Federal debt outstanding is just under $12T, so one could say that 6% of that is backed by student loans, which are defaulting at rates of 10-15%. At the same time, we see GE exiting the retail lending business. Crowding out? Another example of the Federal gov’t taking on risk that the private sector doesn’t want, just to keep the ball slowly rolling up the hill?
–Several Fed speakers in the early part of the week, notably Dudley at 12:15 EST, then Plosser at 1:30 Monday. On Tuesday Evans speaks at 2:15 and then Bernanke in the evening. CPI and Retail Sales on Wednesday.
