Apr 5, 2010. Bearish interest rate action after weaker than expected NFP

April 5, 2010.  In response to an employment report that wasn’t particularly robust, (weaker than expected payroll growth, long term unemployed rose to 6.5m and % of unemployed for 27 weeks or more rose to record 44.1% of all jobless), interest rate futures sold off.  Ten year yield rose nearly 6 bps to 3.947, matching the high yield of 2009.  The curve steepened across the board, with new recent highs in all one-yr calendar spreads in eurodollars, and a slight new recent high in 2/10 spread 283.5. When a market reacts to somewhat bullish news by selling off, it’s fairly clear that bears have taken control.  In spite of a stronger dollar, concerns about this week’s supply (3’s, 10’s and bonds) are now the dominant theme.  However, there was still new selling of TYM 114p on Friday in size of about 8k, from 29 to 33. 

–Part of the reason for the sell off in treasuries and inversion of 10 yr swap spread may have to do with Obama’s new mortgage modification plan.   Pieces on zerohedge and BBG describe this plan as a swap of impaired mortgage paper, which will be marked down though apparently not to actual market values, with FHA guaranteed paper.  Just a huge transfer of risk from the financial sector to the treasury, and in turn to the taxpayer.  It’s no wonder the market is turning a cold shoulder to US debt, as the gov’t takes on more and more risky assets. Not surprisingly BBG reports that subprime mortgage securities are rising smartly due to this plan.  http://www.zerohedge.com/article/guest-post-tim-geithner-sniveling-scamster

–Many analysts believe that growth will be sluggish going forward, and a friend suggested that there was no way that the buying power from Mortgage Equity Withdrawals (MEW) from past years could be replaced as a driver of consumption.  So I reviewed data and compared MEW as % of GDP with the Fed’l Gov’t Deficit as % of GDP.  In the largest years 2005/06, MEW was around $600 billion annually.  As a percent of GDP in 2005, MEW was approx 8% of GDP, in 2006 7%, in 2007 around 5%, and finally zero or negative from 2008 on.  However, the fed’l budget deficit completely filled the hole in the past couple of years, rising from 1.85% in 2006 and 1.14% in 2007, to 3.18% in 2008, 9.91% in 2009 and 10.64% in 2010 (estimate).  On top of that, (further offsetting the destruction of wealth/money through bankruptcies, etc) the Fed’s balance sheet has grown from about $760B to $2100B in a year. 

–During the MEW years, many people realized the situation was simply unsustainable.  But as Citi’s chairman at the time said (Prince?), “As long as the music’s playing we’re going to dance.” Now we have “growth” being manufactured by extraordinary gov’t support.  Again, the situation in my opinion is unsustainable, as we have seen in other nations.  However, the music is still playing… for now. 


Other notes/links:

Reuters:  NY Gov Paterson asks public workers to forgo pay increases….

“I do not believe that, at a time when more than 300,000 of the hard-working New Yorkers who pay our salaries are out of a job, it is fair to continue the status quo with one segment of the workforce,” Paterson said in a statement. “We are in the midst of an extraordinary fiscal and economic crisis.”  Scheduled 4% pay increase.  Unions rejected the idea.

Reuters: Morgan Stanley pulling out of an Atlantic City casino project…will cause a “substantial loss” on its $1.2b investment.  (By the way, as of Thursday market cap of MS was $40.8 B).  This is ONE project. 

(Reuters)More Americans filed for bankruptcy protection in March than at any time since federal bankruptcy laws were overhauled in 2005, reflecting the unevenness of the economy’s stabilization after the deepest recession since the 1930s.

The total increased 20 percent from 132,005 last March and jumped 35 percent from February’s 117,240,

MONTEREY, Calif.–Local wine growers said a proposal in California to tax wine $5 a bottle will kill their business, and the California economy along with it.

Mexico under seige??

Reporting from Mexico City – Drug traffickers fighting to control northern Mexico have turned their guns and grenades on the Mexican army, authorities said, in an apparent escalation of warfare that played out across multiple cities in two border states.

In coordinated attacks, gunmen in armored cars and equipped with grenade launchers fought army troops this week and attempted to trap some of them in two military bases by cutting off access and blocking highways, a new tactic by Mexico’s organized criminals.

NY Times–Pay Garnishments Rise as Debtors Fall Behind  “After winning, creditors can secure a court order to seize part of the debtor’s paycheck or the funds in a bank account, a procedure called garnishment. No national statistics are kept, but the pay seizures are rising fast in some areas — up 121 percent in the Phoenix area since 2005, and 55 percent in the Atlanta area since 2004. In Cleveland, garnishments jumped 30 percent between 2008 and 2009 alone.”


The number of long-term unemployed (more than 27 weeks) in March rose to more than 6.5 million. The percentage of people unemployed for 27 weeks or more also rose to a record 44.1% of all jobless. 



Of course, they’re “purchasing mortgage bonds”, because the government is going to insure them. It’s a “no brainer”. And don’t you love that expression, “a handoff”, because that’s exactly what it is. The government hasn’t stopped pumping liquidity into the system; they’ve just found another entry-point where they can push it in. Here’s how it works: The new program offers incentives to banks and other deep-pocketed investors (in mortgage-backed securities) to slash the principal on underwater mortgages which keeps people from strategic default or foreclosure. Sounds good, right? But here’s the catch: When the mortgage is refinanced, it’s converted into a FHA-backed loan which provides an explicit gov-guarantee. So, for a slight loss on the face-value of the MBS, the investors (ie–investment banks, hedgies, etc) are able to resuscitate their moribund securitizations (MBS) and reap hefty gains. It’s like taking Fido’s steaming pile on the front lawn and turning it into the Hope Diamond. Abracadabra!

Posted on April 4, 2010 at 4:35 pm by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply