Thursday 7/10/08 ... Who's At The Door?

By: Matthew Graham •
After a wild "party" thrown by the financial markets the last several days (with many unruly guests), Mr. and Mrs. Financial Market are cleaning up their mess of a home.  After "Panic" and "GSE insolvency" left the party, just a few familiars remained ("inflation," "slow growth," "counterpary risk," to name a few), the party looked like it would be at least manageable despite the very extroverted "equities bear" dominating the conversation.  The night passed reasonably and Mr. and Mrs. Financial Market were agreeable to those certain familiar characters crashing at their place for the night.  But in the early morning, the doorbell rang, and the unmistakable tones of "Panic" and "GSE Insolvency" rang out: "We're Baaaaaack!" 
   
 
The Numbers:

6.0% FNMA is even at 101-14

5.5% FNMA is down 4 ticks at 99-00

Both of these are much better than Yesterday morning's levels, but not quite as good as the highs.  Day over day, pricing should be level according to MBS, but some lenders may have hedged due to morning uncertainty.

 
The News:

  •     Jobless Claims
    • 346k versus average estimates ranging from 395k to 399k
    • Has not played a major role in trading this morning as continuing claims remain weak.
  •      Foreclosures
    • rose 53 percent in June year over year and repossessions increased the most in the history of the report which only goes back to January 2005
  • Paulson and Bernanke
    • See full text below.  They are still in the Q and A period which has a live feed on www.cnbc.com.
    • So far the bond market has reacted semi-favorably to this, picking up 2 or 3 ticks off the lows of the morning.
  • Stocks
    • Extremely volatile session with the Dow currently down 13 pts
Lock/Float Conclusion:
  • Float
  • Vigilance: High

We saw spreads blow out wildly earlier in the week after the solvency of the GSE's was called into question.  The following day, OFHEO's Lockhart said that they are sufficiently capitalized.  The spreads tightened dramatically and that momentum carried over through yesterday.  Now this morning, William Poole is out saying that the GSE's are, in fact, technically insolvent.  This hasn't blown spreads out nearly as bad as it did 2 days ago, largely owing to the governmental attention the issue is getting.

Speaking of that, Paulson and Bernanke are calling for more regulation.  Barney Frank (for once) doesn't have steam coming out of his ears.  It is worthy of perpetual astonishment to see just how woefully underinformed certain members of the committee, ostensibly devoted to "Financial services" are concerning, well, financial services.  One would think that a crisis so central to our current economy would be better understood by our lawmakers.  When a member of the financial services committee says "I learned about something called a MARGIN?!  Which I never knew existed!" we have to wonder who is at the helm of this ship.

Whatever the case, trading is fairly tame right now on the bond market. Spreads are steady, price levels are steady.  After the Q and A ends, the lemmings will begin to run, so we'll have to see which way the majority is headed.  Either the proposed regulations will bolster confidence in counterparty risk, or else the existence of such a debate will be seen as an indication of ongoing weakness.  So far it looks to be clearly the former, but stay tuned here for another update after the session is over.