We have a world class secondary market department and they are kind enough to send out weekly updates to us sales monkeys. I like posting it as it is both a great source of technical and anecdotal information. Please let me know your thoughts!
The Week Ahead in the Capital Markets - October 8, 2007
“Jumbo loan prices – of both the adjustable- and fixed-rate varieties – had a banner week. Spreads, while not back to pre-collapse levels, are trading at levels that might even be called respectable. Our sources tell us that while lower credit tranches are not yet trading well, the AAA pieces are as well-received as they have been in months. Rate sheets came back in stair steps, with Wells posting strong fixed-rate bids early in the week, and CitiMortgage and Chase posting very strong ARM levels late in the week and today. While spread markets are still volatile, we are getting more optimistic by the day. Corporate bonds, junk bonds, and LIBOR swap spreads are all moving tighter because liquidity has returned to the financial markets. Banks are lending, the commercial paper market has stopped its collapse, and LIBOR has returned to approximately 0.50% over Treasuries.”
Even the employment markets seem to be recovering. “Was it all a dream?” asks Barron’s in reference to August’s terrible jobs report. September’s report was right on the money (+110,000 jobs) and was full of upwards revisions that made the August report a whole lot better (+89,000 jobs instead of a loss of 4,000). Friday’s report made trading interesting – the ten-year Treasury fell 100bps and has returned to where it was prior to the Fed rate cut.
The odds for another rate cut on Halloween dropped to about 50/50, and plunged for any cuts beyond that. The last three times the Fed initiated a new easing cycle, ten year bond yields dropped 20 basis points or more in the next five days. This time they rose by 20 basis points, which didn’t help mortgage rates a bit.
Are our dreams of lower rates turning in to nightmares? Bill Gross and John Mauldin don’t think so. They are both predicting that the Fed will cut rates to 3.75% before the housing mess is done. At the moment, however, the bond market is clearly worried about inflation. “The market should start worrying about something else,” said John Mauldin. “Inflation is not a problem in a recession, and certainly not in one caused by the bursting of the largest housing bubble in US history. Be definition, those are deflationary events. If we have a simple slowdown I think rates drop to 4% or less. If we see a recession, short term rates will drop below 3%.”
Here's good news: George W. Bush says that he is committed to fighting global warming. Yeah, well, he nipped that in the bud, didn't he? – (David Letterman)
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