Many (including myself) are scratching their heads about today’s MBS trade. As we head into the last hour of trading, the 10 year note has given up all of its gains and actually gone negative. Mortgage backs have continued their slide no matter what interest rate you’re looking at.
Some blame this on a large hedge fund liquidation (2 billion) that swapped MBS for treasuries. Others comment on 3 billion of new origination paper that hit the street today. Part of the whip lash seems to be coming from traders reading the tea leaves of the Housing Summit. Comments by Bill Gross that Pimco wouldn’t buy a mortgage security unless the government backed it or if they did, they would require a minimum of 30% down payment. Other comments range from having FNMA/FHLMC reduce all current mortgages to 4.0% as a stimulus measure for the economy. How would you like to be invested in a few billion of 4.50% or 5.0% paper and take a hair cut to 4.0%? Talk is also cheap about what to do with FNMA and FHLMC.
Moving towards a private structure has been estimated to increase rates by 300 bps. Once again, what would you do if you had a few billion of MBS paper? At the market one day, 300 bps in the hole the next. Obviously, most of this is lunacy but just the same, its scaring the H E double hockey sticks out of the investment community. Markets hate uncertainty. That’s why they run for cover. Best to grab a flack jacket until some sort of sanity returns.
