Posted on 09/26/2012 1:25:34 PM PDT by whitedog57
QE3 certainly has wreaked havoc on the agency mortgage-backed securities market. The Fannie Mae 30 year current coupon (rate to MBS investors on new Fannie MBS) spread over 10 year Treasures has gone NEGATIVE! As in -3.65 basis points.
But if we compare the Fannie 30 year current coupon to 5 year Treasury yields, we have a positive yield spread of about 100 basis points.
Meanwhile, Fannie Mae 3.5 MBS duration just went negative!
So, The Fed’s QInfinity has really done a number on MBS yields … and risk. MBS investors may be lining up to dump agency MBS on The Fed. Particularly when Treasury yields are HIGHER than Fannie MBS yields (and Fannies have negative duration!!!!!).
(Excerpt) Read more at confoundedinterest.wordpress.com ...
Therefore the funds are actually paying the govt to borrow the money, correct?
What does this mean in English please—description is above my paygrade.
For us rubes out here in ‘fly over country’ what is MBS?
Mortgage Backed Securities
Basically it means that the lender is paying the borrower to borrow the money.
The Fed is looking high and low to buy Mortgage Backed Securities. This makes their prices high, and their interest coupons low. It should lower home mortgage rates.
A typical MBS should have a higher interest rate than a Treasury of the same maturity. And, all things being equal, a 30 year bond will usually have a higher coupon than a 10 year, from the same issuer. So, if 30 year MBS are selling with a lower interest rate than even 10-year Treasuries, the Fed is really distorting the home mortgage market. I think the idea is to push up home prices by lowering the carrying cost of mortgages.
Anybody stupid enough to invest in an MBS deserves to lose every cent.
This means the yield you receive on a mortgage-backed bond is yielding LESS than a 10 year US Treasury Bond.
I’ve never seen such a thing.
Every senior citizen, whose interest proceeds from their savings have been stolen by Ben Bernanke’s outrageous fed rates scams, ought to vote for Mitt Romney. He has promised to fire Bernanke, an Obama political hack from the word go.
http://www.youtube.com/watch?v=UC31Oudc5Bg
A very funny (but VERY true) comedy sketch by Bird and Fortune talking about this type of thing. Mortage talk come in about 2:45 minutes.
“Similar dodgy mortgage debts are bundled together...”
Why would you buy it?
“It has a great name like “High Grade Structured Enhanced Strategy Fund”
It is so VERY true all that they talk about. Not sure if to laugh or cry.
Actually, the Fed can’t do much to force banks to lend. While they can play cames with mortgage rates in the secondary market, the new mortgage rates are still set by a spread over LIBOR or the 10 year T.
The first reason for the Fed’s meddling in the RMBS market is to take non-performing paper off the banks’ balance sheets.
This is just another bailout of the TBTF banks.
“Therefore the funds are actually paying the govt to borrow the money, correct?”
That’s perhaps one way to state it, but your summation can be understood two different ways: The funds are paying [normal interest] to borrow [the government’s] money; or, the funds are paying the government to borrow THEIR money FROM THEM., from the funds themselves. It’s effectively paying a bank for safely holding your funds. Which is bizarre; but as rates go to zero...we may become accustomed to such weirdness.
Another way to state it is that the funds are paying the gov’t to get their own money back.
This is just another bailout..
I agree with that, too. Once off of the bank's balance sheets and onto the Fed's the valuation of these instruments goes into a black hole. The Fed will just let them run off, and hope the defaults get buried under some other item over time.
But Bush hired him.
Well, that would be every pension fund in America - since they have always come with an implicit (but carefully unstated) guarantee that they will be Federally backed to the same level as Treasury Bonds.
Book mark this for later.
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