MBS MORNING: OFF THE EARLY LOWS
Good Morning Mortgage world...
MBS trading has been quiet to start the day. MBS market participants are gladly welcoming a steeper US Treasury yield curve this morning (to allow for another "up in coupon" buying opportunity). At the open the stack was trading a few ticks lower but has since recovered a few 32nds while TSY yields move off their early morning highs.
APRIL FN30_____________________________
FN 4.0 -------->>>> -0-01 to 100-07 from 100-08
FN 4.5 -------->>>> -0-02 to 101-27 from 101-29
FN 5.0 -------->>>> -0-01 to 102-28 from 102-29
FN 5.5 -------->>>> -0-01 to 103-16 from 103-17
FN 6.0 -------->>>> -0-01 to 104-03 from 104-04
APRIL GN30_____________________________
GN 4.0 -------->>>> -0-01 to 100-11 from 100-12
GN 4.5 -------->>>> -0-02 to 102-00 from 102-02
GN 5.0 -------->>>> -0-01 to 103-12 from 103-13
GN 5.5 -------->>>> -0-02 to 103-27 from 103-29
GN 6.0 -------->>>> +0-01 to 104-11 from 104-10
FN45 PRICE GOING UP....
AS US 10 YEAR TREASURY YIELD FALLS...
The week began with headline news in the spotlight after Treasury Secretary TIMMMMMAAAY Geithner let loose DETAILS on the Obama Administration's plan to remove "legacy" assets (formerly known as TOXIC) from bank balance sheets.
The program calls for $75 to $100 billion TARP funds to be combined with funding from private investors to "generate $500 billion in purchasing power to buy legacy assets".
From Treasury Secretary Geithner's Op-Ed in the Wall Street Journal
"The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate. Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets"
Plain and Simple: The broad objective of the "Public Private Partnership Investment Program" is to make a liquid market for "legacy assets" and "legacy securities" (toxic mortgage assets). If all goes as expected this program will serve to weaken protectionist strategies and expedite the restoration of global investor confidence......which will in turn increase the flow of credit to businesses and households (and slow any downward economic spirals we may already be stuck in)
This approach assumes investors will be convinced that legacy assets will have LONG TERM VALUE...if bought at the right price. The Treasury is essentially betting that these assets are NOT WORTHLESS and have only been unfairly subjected to negative media headlines which have only exacerbated the valuation conundrum.
So...in order to re-liquefy the market (persuade buyers and sellers to find middle ground/coerce buyers to pay more than market deems assets are worth at the moment) the Treasury/FDIC will subsidize the purchase of legacy assets by participating in 50% of the transaction and allowing up to 6:1 leveraged financing (really 12:1 for the private buyer).
Remember banks have been unwilling to sell because the market has not offered an acceptable bid. The Treasury plan is basically, through the use of FDIC guarantees and TSY capital, attempting to meet the demands of both sides of the transaction. The market remains undecided on how effective this plan will be...all we can do is wait and see how it plays out. If you are interested in monitoring the sentiment over this plan you will definitely see it play out through the major stock indexes...but also keep a close eye on the dollar/yen trade.
Stock Markets are currently having second thoughts about their initial reaction to "more details" regarding the Treasury's plan to save the world...the Dow is -90 (1.2%), the S&P is down 9 points ( 1.11%), and the NASDAQ is down 21 points ( -1.66%)
Bernanke and Geithner are sitting before the House Financial Services Committee at the moment...answering MORE QUESTIONS about AIG. Ugh AIG
The Treasury will auction $40bn 2 yr notes at 1pm...