Investors Pour Cash Into Mortgage ETFs (Safety Net, A Touch Of Yield [9.15% Versus 10Y Treasury Yield Of 2.66%])

A touch of yield? Like in 2006-2007??

(Bloomberg) — Investors on the hunt for both safety and a touch of yield have made a product stuffed with mortgage-backed securities the third-most popular exchange-traded fund this year.

The $15 billion iShares MBS ETF, or MBB, has taken in more than $3 billion this year, according to data compiled by Bloomberg. Buyers have added about $1.5 billion in February alone, putting it on track to be the largest month of inflows since the fund started in 2007.

Agency mortgages are a sweet spot for investors willing to take on just a little bit more risk than offered by Treasuries, getting more yield than the government debt without the credit risk that goes alongside corporate bonds. Securities backed by home loans have also benefited from the Federal Reserve’s decision to hold off on interest-rate increases, as higher borrowing costs discourage refinancing and increase the duration of these securities.

“Even though something like HYG may seem more attractive for yield hunters, mortgages are a way to get a nice coupon while still being cautious,” said Mohit Bajaj, director of exchange-traded funds at WallachBeth Capital, referring to the iShares iBoxx High Yield Corporate Bond ETF by its stock ticker. “It’s about finding yield with safety.”


Like Bill Gross’ Janus-Henderson bond fund, the iShares Mortgage ETF has performed relatively poorly.


Partly, investors are running for cover. But some like the iShares Mortgage ETF dividend yield of 9.15%. Especially with the 10-year Treasury Note yielding only 2.66%.


China Unleashes Godzilla-like Credit Injection To Start 2019 (PBOC’s Godzilla Versus Fed’s Mothra?)

China’s teetering economy has led to a godzilla–like credit injection.

Check out China’s all-system financing aggregate.


Since all Central Banks are stimulating their economies with monetary easing except the US Federal Reserve, will the US Fed counter? I feel like I am watching Godzilla versus Mothra.


Yes. Godzilla is Japanese, but it is a short trip across the East China Sea to Shanghai.


Here are The Fed’s Esther George and Lael Brainard invoking the Moth Spirits (as opposed to animal spirits) to combat China’s massive infusion of credit into their economy.


Mortgage Applications Drop Despite Lower Mortgage Rates (Industry is Dazed And Confused)

Ah, the problems of trying to model residential mortgage purchase and refinancing applications. When mortgage rates fall, model predict a rise in both purchase and refinancing applications. This has left mortgage modelers dazed and confused.

But the recent Mortgage Bankers Association report, revealed that mortgage applications DROPPED 4.78% WoW despite mortgage rates dropping as well.


Mortgage rates have been dropping since November, yet mortgage purchase applications dropped in for the latest week. Very likely this was the displacement of purchase applications was simply the “start of the year” effect after a sleepy holiday season.


Ditto for mortgage refinancing applications. Despite mortgage rates declining. there was “start of the year” surge. But continued rate decreases have resulted in generally declining purchase applications after the surge.


On a long term view, purchase applications have remained sedate following the financial crisis and new regulations.


Mortgage refinancing applications remain in Death Valley.


Perhaps there is a communications breakdown?

“Solid” Fannie-Freddie earnings are a foundation for mortgage giants’ next act (EPS Miss)

MarketWatch – Fannie Mae FNMA-3.02% and Freddie Mac FMCC-2.57% on Thursday reported earnings that reflected a healthy, yet slowing, housing market, even as weighty questions about their future swirl.

The two enterprises are at the heart of the American housing finance system: they buy mortgages from banks and other lenders, enabling lenders to extend credit for longer periods than would be possible if they had to keep the loans on their own balance sheets, and, presumably, open up the housing market to a larger swath of the population. Throughout 2018, the two companies together funded approximately 3.2 million mortgages.

In the fourth quarter, Fannie had net income of $3.2 billion, and Freddie had $1.5 billion. The two enterprises are still in government conservatorship, as they have been since the 2008 financial crisis, and will sweep those profits over to the U.S. Treasury in March, while continuing to retain a slim capital buffer of $3 billion each.

It is difficult to compare the companies’ financial results to the year-earlier quarter because that’s when changes in the tax laws left both with hefty accounting losses. Compared to the year ago quarter, Fannie’s pretax income fell to $4.06 billion from $4.96 billion, while Freddie Mac’s dropped to $1.39 billion from $3.82 billion.

Despite Fannie and Freddie’s positive net income, analysts were expecting even higher earnings. Take Fannie Mae, who earnings have generally fallen as the housing market cools.


But FF’s equity has soared recently on specualtion of Fannie and Freddie being released from Treasury bondage.


On Thursday, the Trump administration’s pick for head of the regulatory agency overseeing Fannie and Freddie, Mark Calabria, is facing the Senate Banking Committee. As MarketWatch was first to report, the interim director of the regulator, the Federal Housing Finance Agency, has already begun working with Treasury to lay out a long-term vision for the American housing finance system, finally freeing the two companies from conservatorship.

If he is approved, Calabria’s responsibility will include two companies that look vastly different than the entities that helped plunge the U.S. economy into turmoil about a decade ago. In the fourth quarter, Fannie’s serious delinquency rate was just 0.76%, and Freddie’s was 0.69%, both near historical lows. Both companies continue to experiment with additional ways of selling slices of their portfolio to private-market investors, in order to spread the risk more broadly. And they continue to work toward the issuance of a single bond, a step that aligns their fortunes more closely, rather than intensifying the competition between them.

Being released from conservatorship can mean many things. One, they became private corporations again (but who or what will provide their capital buffer?). Second, they could be shut down (likely gradually) and the private market takes care of securitizing residential mortgage loans. And about 5,000 other proposals, most are just more of the same.

But this is Washington DC, and they will tell “we the people” as little as possible.

Here is the link to Mark Anthony Calabria’s hearing testimony that began at 10am. Perhaps Calabria will shed some light on what he plans to to as FHFA Director.

Here is a photo of both Mark Calabria and I testifying in the House. Calabria looks like he is thinking “What is Sanders going to say?”



Retail Inferno! U.S. Retail Sales Ex Auto Fall the Most Since Great Recession (Brainard Supports Ending Fed Balance Sheet Shrinking)

It was truly a “Retail Inferno!”

US Retail sales fell MoM 1.2% in December and -1.8% Ex Auto.


Here is a graph showing the tanking of December retail sales.


And we if take out auto sales …. the worst plunge since The Great Recession.


Meanwhile, Federal Reserve Governor Lael Brainard indicated she favors ending the process of normalizing the central bank’s balance sheet later this year.

“That balance-sheet normalization process probably should come to an end later this year,” she said Thursday in an interview on CNBC.


Ya think Lael? (second from right)




Are Declining Federal Tax Receipts A Harbinger Of Recession? Or Tax Cuts?

Typically, before and during economic recessions, Federal government tax receipts plunge like a paralyzed falcon. And they are plunging again.


Could it be the tax cuts taking effect? Or is it a precursor to a recession? Or both?

Inquiring minds want to know!


My favorite!


Or this Federal Reserve newspaper cover!


January US Inflation (Core) Remains At 2.2% YoY (While CPI YoY Declines To 1.6% YoY)

Where’s the inflation former Fed Chair Janet Yellen said was right around the corner?

US Inflation, at least the way the BLS measures it, either declined or remained the same in January.


Core inflation YoY remained at 2.2%.


Rent inflation dropped slightly to 3.2% YoY.


This is in keeping with slowing home price growth.




Consumer Debt Up Almost 50% Since Fed’s QE Began, Mortgage Debt Down 1.66% (Consumer Debt Now Tops $4 Trillion, Student Loans Up 128% Since Q4 2008)

If The Federal Reserve’s goal was to pile more and more debt on consumers, it achieved its goal!

According to a recent study by The Federal Reserve of New York’s Center for Microeconomic Data, as of Q4 2018, US Consumer Debt has topped $4 trillion.

That is an increase in consumer debt since The Fed started their asset purchase programs of 48%.


Mortgage debt, on the other hand, has fallen 1.66% since The Fed began purchasing assets in Q4 2008.

Student loans are up 128% since Q4 2008.

So if The Fed’s goal was to saddle millions of households with consumer debt and student loans ,,,, Mission Accomplished!!!

Then there is the $22 triillion in Federal debt …






Banco Santander Feels Bondholder Heat After Skipping CoCo Call (Is The Spanish Banking Armada Sinking?)

It appears in Euroland that another bank bites the dust.  Or is struggling.

(Bloomberg) — Banco Santander SA reminded investors that juicy bonds can come with nasty surprises.

The Spanish lender rattled the bank Additional Tier 1 market by saying it will skip an option to call 1.5 billion euros ($1.7 billion) of perpetual contingent-convertible notes next month, sending the bonds tumbling. The announcement came late Tuesday, right at the deadline for a decision, after the bank kept investors in the dark for weeks regarding the call option and in the aftermath of another deal, a sale of dollar AT1 notes on Wednesday.

“The handling of the situation was truly disastrous,” said Timothee Pubellier, a portfolio manager at Financiere de LA Cite SAS, which holds Santander CoCos. “Credit investors will need some serious new issue premium to touch that name again.”

The Spanish bank opted against a call due to an “obligation to assess the economics and balance the interests of all investors,” a company spokesman said in an email. “We will continue to monitor the market closely and will seek to exercise call options where we believe it is right to do so,” he said.

The euro AT1s tumbled to 97 cents on the euro following the announcement. The notes traded at almost par last week when the dollar CoCo sale stoked optimism for a call.

The decision to skip the call may drive up costs across the market for the regulatory-driven bank bonds as investors have traditionally priced CoCos in the expectation that they will be called at the first opportunity. It may also tempt other banks to follow suit, presenting a looming market risk as the number of AT1s with low post-extension rates approaching their first call dates will pick up into next year.

“This is very surprising and it is a really bad news for CoCos, specially for those that have low coupon for the first call,” said Alfonso Benito, chief investment officer at Spanish asset manager Dunas Capital. “The market is going to request additional premium for this kind of product in the future.”

The yield to maturity on the euro AT1s widened to 5.7 percent after the non-call announcement. The bank’s dollar AT1s with a May call option slipped to 97.8 cents. Its American depositary receipts traded slightly higher in New York, climbing 0.7 percent to $4.55.

Skipping the call may work out cheaper for Santander than redeeming the notes and selling new ones because the floating rate after extending the existing notes is lower than current market-funding costs. Against that, the bank had to weigh potential reputational damage that could drive up borrowing costs across its future subordinated issuance. Other banks will have to make similar calculations in the months ahead.

Banks have rarely broken with convention on calling subordinated notes at the first opportunity. Deutsche Bank AG roiled credit markets in 2008 when it skipped a call option, triggering investor losses. Assumptions were shaken again in 2016 when Standard Chartered Plc and German lender Commerzbank AG extended similar notes.

Market Maturing

For some, the decision had merits. Redemption is voluntary and regulators gave banks no extra incentive to call the notes as they didn’t include a guaranteed coupon step-up in the design of the notes.

This is a “sign of the market maturing,” said Steve Hussey, head of financials research at AllianceBernstein Holding LP. “This is what banks are supposed to do. It should be an economic call decision, not reputational.”

AT1s are the riskiest form of bank debt, as the notes can be written off or converted into equity if a lender’s capital level drops too low. Lenders can also skip coupon payments without triggering a default. These risks for investors are offset by high coupons that have let euro investors post total returns of 3.9 percent on CoCos over the past year, according to Bloomberg Barclays index data. That compares with just 0.5 percent for senior euro bank notes.


Santander’s 6.75% CoCo bond is now yielding … 33.40%.


Is the Spanish banking Armada on fire?