Aug 20. Does a flight to quality bid spark a mortgage refi bid?

— US rate futures have been fairly boring for the past couple of sessions, with stocks floating higher and sellers attempting to press treasuries lower on this sign of apparent economic strength (that less astute traders must be missing).  Since August 8, when stocks reversed their sell off and soared from 1905 to 1975, tens have mostly edged higher, TYU having been slightly below 126 on 8/8 and now trading slightly above at 126-04.  Sellers keep trying to press, waiting for the rest of the world to wake up to the obvious signals in the US equity market.  But it appears as if the rest of the world just wants to find a safe harbor, which has led to a dollar bid, and underlying support in treasuries, and of course stocks as well.  Yesterday the ten year yield edged up 1.5 bps to just above 240, with TYU teasing shorts at the 126 strike going into Friday’s option expiration.
–In the bigger picture, I saw a headline scroll across Bloomberg that Poland’s tens were trading at a new low yield, 3.09.  Sure enough, I checked out world bond yields and saw Poland just as advertised, with Bulgaria nipping right behind at 3.10.  These are the “high yielders”!   Japan’s at 49 bps and German bunds are on either side of 1% with schatz a few bps below zero.  Global debt levels and the growth of CB reserves have actually served to keep yields low, with bad debts allowed to linger on.  Zero rates have forced investment managers to pay up for that incremental dollar of earnings or yield.
–In terms of US rates, there was a rather interesting piece in the FT Monday, which argued for tens to reach 2%.  Part of the reason has to do with the Fed’s mortgage portfolio: “…the Fed, the biggest mortgage investor on the block, has made clear it will reinvest principal repayments dollar for dollar. Normally, the widening in mortgage spreads mutes the impact of the rate decline on mortgage rates, slowing the pace of refinancing.  This time, advertised mortgage rates are likely to fall more rapidly than in prior refi experiences.”  The idea is that as tens approach 2.25%, a new wave of refis may hit.  The Fed will just take the proceeds of called mortgages and reinvest, with no sensitivity to returns. And if the Fed’s not sensitive, doesn’t it make sense to get out in front…  The home mortgage market is about $9.35T according to the last Z.1.  The Fed holds about $1.7T in mortgage securities.  (Total Fed gov’t debt is $12.57T).  Is the Fed’s portfolio large enough to cause a rippling rally IF the refi wave hits?  I don’t know.  But it certainly makes me understand wingy call buyers.

Posted on August 20, 2014 at 5:35 am by alexmanzara · Permalink
In: Eurodollar Options

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