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.”

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

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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%.

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“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.

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

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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?”

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The Crazy World Of Libor, Swaps And Treasury Yield Curves (Fire? or Ice Axe Cometh?)

Financial markets are experiencing “The Crazy World of Libor, Swaps and Treasury Yield Curves.” 

In other words, all three curves have a downward sloping section, all at different times, but all short-term (less than 6 year maturities).

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What uncertainties are in financial markets and the unlying economies, you may ask? How about trade (e.g., US and China trade flows), Brexit, China’s recession, Japan’s ongoing stagnation (despite negative interest rates), Italy and Germany’s slipping into darkness, not to mention uncerainty about The Fed’s path for balance sheet unwind.

The Fed’s balance sheet is a particular concern since the 10-year Treasury Note yield began to rise when the unwind began, but rates have gone DOWN when the unwind got serious in 2018. Or is Fed Chair Jerome Powell really “The Iceman”?”

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Here is a photo of Fed Chair Jerome Powell weiliding his “ice axe.”

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(Un)Willing! Bank Willingness To Lend To Consumers Drops To Zero (Recession Alert!)

It seem s that banks willingness to lend to consumers hass fallen. Perhaps it should be an index of “Willing.”

Bank willingness to lend to consumers, a prime driver of Federal Reserve monetary policy, typically slumps to zero before a recession.

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Yes, as The Fed continues to unwind its balance sheet, bank willingness to lend to consumers is melting.

The Federal Reserve Open Market Committee (FOMC) looks at the bank willingness to lend numbers.

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Three-Month Libor Fixing Falls by the Most Since May 2009 (Signal That The Fed Might CUT Their Target Rate?)

One of the world’s most important borrowing benchmarks staged its biggest one-day decline in a decade on Thursday.

The three-month London interbank offered rate for dollars sank 4.063 basis points to 2.697 percent, the largest one-day slide since May 2009. The move may reflect a benchmark that’s making up ground following a repricing of short-end Treasuries and associated instruments in the wake of the Federal Reserve’s dovish pivot in recent weeks.

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The 3-month LOIS spread (3-month Libor – Overnight Indexed Swap rate) has been receding … again as of Feb 5th (Libor rates on Bloomberg as not updating on Feb 7).

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Typically, Libor rates rise ahead of Fed rate hikes. While the “catching up” explanation is likely, it is also possible that Libor is signalling a cut in the Fed Funds rate coming up.

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The stock market is pleading for SLOWDOWN in monetary normalization.

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Yes, it is possible that Libor is signalling that The Fed will try to give more oxygen to financial markets.

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Fed Tightens Agency MBS Holdings Day After Powell Hinted At Stopping QT (Oops, They Did It Again!)

Oops, they did it again. 

After hinting on January 30th that The Fed is considering halting shrinking of its balance sheet (better known as Quantitative Tightening), The New York Fed reported yesterday that their agency mortgage-backed securities holdings had been reduced by $7 billion. Aparently, The Fed is sticking to autopilot in terms of shrinking their balance sheet, at least for the moment.

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Again, only Agency MBS was reduced in the amount of just over $7 billion. All other holdings remained the same from the previous week.

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In other words, despite the talk, talk, The Fed is continuing to drain the punchbowl.

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US Pending Home Sales Fall 9.5% YoY In December To Lowest Level Since 2014 As Fed Unwinds

As The Federal Reserve continues to unwind its balance sheet, pending home sales YoY declined 9.5% YoY, the worst since 2014.

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Pending home sales got a big boost from The Fed’s third round of asset purchases (QE3), but PHS are feeling the pain of The Fed’s unwind.

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I wonder if “The Savior,” Ben Bernanke, saw this coming. Doctor, doctor (Bernanke), we’ve got a bad case of declining pending home sales.

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Simply Unaffordable! The Fed And Why Apartment Rents Are So High And The 1-Unit Housing Bubble of 2006 Market Distortion

The infamous home price bubble and financial crisis of 2008 is easily blamed on 1) subprime borrowers, 2) Collateralized Debt Obligations (CDOs), 3) financial derivatives, 4) tricked-up ARMs (adjustabe rate mortgages) like pay-option ARMs, 4) lack of regulatory oversight (The Fed claimed that is wasn’t their job!), etc.

But what generally overlooked is the supply response by developers and homebuilders to the sudden decline in interest rates (following the Fed Funds target rate).  A construction boom occured in the early to mid-2000s until The Fed decided to raise rates rapidly again in 2004 that helped result in a crash of 1-unit housing starts that never really recovered. True, subprime borrrowers disappeared (or shifted to FHA-insured loans), and tricked-up ARMs have been discouraged by the Elizabeth Warren brainchild The Consumer Financial Protection Bureau (CFPB). So, now we have increasing 1-unit housing starts at a lower level (fewer borrowers relative to the 2000s) and an over-supply of houses that the US is still trying to work through.

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Multifamily (5+ unit) starts collapsed in 2008 following the foreclosure wave that put thousands of homes on the market, generally at reduced prices. But as wage growth slowed following The Great Recession, the demand for apartments increased (generally more affordable) and the rental vacancy rate is near the lowest level since 2000. Low vacancy rates, rising apartment rates = affordability crisis.

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Why don’t developers and homebuilders (apartments) put up more supply? If some areas, like Northern Virginia, they have responded. But rents in Washington DC and NOVA remain high. (Check out Rent Cafe). But national rents continue to rise as well.

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Another compounding factor is tight land use controls in most major cities, preventing a supply response. This essentially forced some households to the suburbs for more affordable housing (some DC workers actually commute from West Virginia to DC or Virginia cities like Front Royal (great apple cider doughnuts at the Apple House in nearby Linden VA).

So housing in the US remains “simply unaffordable.” And with tight local housing regulations. the US housing market is addicted to gov(ernment).

 

 

 

US Economy Growing Above Long-run Trend Without Sustained Inflation (As Gov’t Measures Inflation)

The good news? The US economy is growing above the long-run trend. But without sustained inflation.

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At the last reading Core Personal Consumption Expenditure (PCE) growth was only 1.88%. Compare that to home prices growing at 4.7% YoY (CS) and FHFA’s Purchase Only YoY at 5.76%.

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Zillow’s rent index for all homes YoY is only 0.485, well below The Fed Funds Target rate and Core PCE growth. And The Fed Funds Target rate is above Core PCE growth.

Here is a closer look at the past year. Rising Fed Funds Target rate, stable inflation (Core PCE YoY), decling house price growth and continued balance sheet undwinding.

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Home Prices in U.S. Cities Rise by Lowest Rate in Almost Four Years As Fed Unwinds Its Balance Sheet (Vegas Fastest Growing, DC Slowest)

Yes, US home price growth continues to slow as The Federal Reserve continues to unwind its bloated balance sheet.862767_cshomeprice-release-0129

(Bloomberg) — Home prices in 20 U.S. cities rose in November at the slowest pace since early 2015, decelerating for an eighth straight month as buyers balk at the ever-receding affordability of properties.

The S&P CoreLogic Case-Shiller index of property values increased 4.7 percent from a year earlier, down from 5 percent in the prior month, and below the median estimate of economists, data showed Tuesday. Nationally, home-price gains slowed to a 5.2 percent pace.

Sure enough, US housing has gotten quite expensive (although not Singapore, Hong Kong or London expensive). But the interesting story is … look at house price growth when The Fed enacted QE3, their third round of asset purchases. Then look at house price growth when The Fed began unwinding its bloated balance sheet.

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Let’s see what happens if The Fed continues its unwind.

On a metro level, Las Vegas (still recovering from the horrid collapse in house prices in the late 2000s) was the YoY leader … again. Followed by Phoenix, rising from the housing ashes of the housing bubble of the 2000s.

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The slowest growing metro areas? Once again, Washington DC has the slowest growth rate followed by Chicago. And then New Yawk (or New York).