Blitzkrieg Bop! US Mortgage Rate Fall As Economic Barbell Stresses US Rates (Treasury Volatility Curve Sends Disturbing Message)

US home buyers are benefitting from European economic misery (particularly Germany and fiscal-stressed Italy). I call this the Blitzkrieg Bop.

On the other side of the interest rate barbell is China (and Japan). So while the USA is growing, Germany and Japan are not doing so well, causing their Central Banks to push rates to zero .,.. or lower. Even China’s Central Bank is buying everything in sight in fear of a recession.

Hence, US mortgage lenders and potential homebuyers benefit is terms of dropping interest rates.

You can see the downward plunge in the Treasury Volatility Curve (MOVE – TYVIX) as Central Banks become active in 2008 and 2009. The 30-year mortgage rate has been declining thanks to hyper-intrusion of global central banks, killing off bond volatility.

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Allegedly, The Federal Reserve is ceasing its raising of their target rate and will stop shrinking their balance sheet in September.

Mortgage purchase applications (NSA) are in their third phase and doing quite nicely, helped along recently by the barbell slowdowns overseas.

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Raw Oyster Stew! BoJ’s Kuroda Says That There Is Room For Interest Rate Reduction (The Swiss Miss?)

Much like the Three Stooges bit “Raw Oyster Stew”,  using Central Banks to stimulate a structurally flawed economy is like Curly trying to eat the raw oyster.

(Reuters) – Bank of Japan Governor Haruhiko Kuroda told CNBC that there is room for reducing long-term and short-term interest rates.

“I think there (is) still some room for further monetary easing if needed,” he said, adding that it isn’t necessary at this stage.

Kuroda also said that the Japanese economy has “slightly slowed down”, partly because Japan’s exports to China have become “somewhat” weak.

Yes, Kuroda can try to push Japanese sovereign rates lower. The benchmark for low interest rates is … Switzerland. (Aka, The Swiss Miss!)

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Swaps? Yen versus Franc swap rates:

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So, Kuroda is suggesting a Swiss put on rates. Or a Swiss Miss!

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My Kuroda!!  

Speculators Increase Short Treasury Futures Position (But Gold LONG Positions Increase)

Speculators are increasinng Treasury short positions while speculators are favoring long positions in gold futures.
Speculators increased net short positioning throughout the Treasury futures curve in the week ended April 9. The bulk of the moves came from adding short positions in 10-year (TY) Treasury futures contracts. They increased their short position in TY contracts by $56,982. And they added some short risk to their two-year (TU) futures positions, after nearly cutting that position in half the previous week.

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Speculators also increased their short positions in five-year (FV), ultralong (WN) and classic 30-year (US). Speculators still remain short every Treasury futures contract.

How about gold? The net futures have actually increased since December.

 

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Bubble Monster! Central Bank Continued Surrender Leading To Declining VIX, Reduced VIX Positions And Rising SMART Money Flow Index

As I wrote at the beginning of The Fed’s quantitative easing (QE)  ventures back in 2008, The Fed will never be able to “normalize” monetary policy. As we have seen, The Fed has all but quit rate hikes and has annoucned end an to QT (quanitative tightening) in the Fall.

In celebration of the eternal Central Bank monetary stimulus, S&P500 volality (VIX) is collapsing … again as VIX Futures open interest is shrinking. Accordingly, the SMART Money Flow Index is rallying as investors see Central Bank surrender.

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The global Central Bank asset purchase bonanza!!

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Coupled with low rates.

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The Fed and other Central Banks are contuning to run their bubble machines!

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Here is a video of The Federal Reserve.

Wipeout! Hidden Bond Market Dangers Expose Traders to $2 Trillion Wipeout

Wipeout! 

(Bloomberg) — Behind the rally in global debt markets lurks a disaster just waiting to happen. At least, that’s what some long-time market watchers are warning.

While dovish comments by the Federal Reserve and other central banks have prompted investors to pile back into bonds, two troubling developments could make buyers uniquely vulnerable to deep and painful losses, they say. One is the sheer amount of ultra-low yielding debt, which means investors have almost no buffer in the event prices drop. That’s compounded by the worry liquidity will suddenly evaporate in a selloff and leave holders stuck with losses on positions they can’t get out of quickly.

Granted, nobody is actually predicting when things will turn ugly in the bond market, and history hasn’t been particularly kind to the doomsayers. Still, the risk is real, they say, and caution is more than justified. By one measure, the amount of investment-grade bonds has doubled to $52 trillion since the financial crisis. And yields have, on average, fallen to roughly 1.8 percent, less than half the level in 2007. If they were to rise by a mere half-percentage point, investors could be looking at almost $2 trillion in losses.

“This is an element of hidden leverage that is not appreciated,” says Jeffrey Snider, global head of research at Alhambra Investments. “We are eventually going to have a shock.”

The current situation is a legacy of the easy-money polices enacted by central banks following the financial crisis. With interest rates at or near zero, governments and corporations went on a historic borrowing binge — and investors gorged on debt that yielded little in return. What’s more, rules to strengthen financial firms and curb their risk-taking meant the big banks now played a much smaller role as intermediaries, transferring more of the risk of getting in and out of trades onto investors.

Using the US Treasury 10-year (yellow) and 3-year Treasury (green) yields, here is a chart of global Treasury modified duration (white).

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Yes, the pounding of global interest rates downwards thanks to Central Bank “easing” has created a potential duration. wipeout.

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And the short-term Central Bank rate hammer is helping to keep global rate depressed, leading to higher duration risk.

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Yes, the Central Banks DID do that!

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Global Supply Of Negative Yield Bonds Hits $10 TRILLION (Europe’s Sweet 16 Of Negative Yielding Sovereign Debt)

To listen to some talking heads, everything is beautiful.

But according to the bond market, everything is not beautiful. In fact, there is concern about global economic growth and financial fragility.

There is now $10 trillion in negative yielding bonds in the global economy.

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And in Europe, there are 16 nations with negatiive 2-year sovereign yields, including Germany and France.

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Notice that the short-end of the yield curves in Europe and Japan are negative.

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People get ready for negative Central Bank rates in the USA!

Surprise! USA In Last Place In Citi’s Economic Surprise Derby, Eurozone In 2nd Place, Emerging Markets In 1st Place (All Three Are Negative, Even With Negative CB Rate In Europe And Japan)

The Citi Economic Surprise Indices measure data surprises relative to market expectations. A positive reading means that data releases have been stronger than expected and a negative reading means that data releases have been worse than expected.

Unfortunately for the USA, it has a negative economic surprise measure, followed closely by the Eurozone (also negative). The “leader” in the Economic Surprise Derby is … Emerging Markets. ALSO negative.

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As a sign of meh economic growth, market implied policy rates are 2.38% for the USA, -0.40% for the Eurozone and -0.06% for Japan.

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The expected Fed Funds target rates are trending downwards.

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Eurozone expected target rates are negative.

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Even Australia is downward trending. Like an overcooked shrimp on the barby.

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True, the lofty expectations for the US economy are not being met.

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Fixing The Holes? G-SIB House Hearing For CEOs Of Citi, Wells, BofA, Goldman, MS, JPMC, Etc. But Where Are Fannie Mae And Freddie Mac?

Today’s hearing in the US House of Representatives Financial Services Committee (where the committee calls Globally-Systemically Important Bank (G-SIB) CEOs to testify and ask them uncomfortable questions).

But today’s hearing should have been extended to mortgage giants Fannie Mae and Freddie Mac that unquestionably qualify as Systemically Important Financial Institutions (SIFIs), both under the statutory and FSOC definitions, and in any objective assessment of their financial importance. Are they G-SIBs? Of course.

Fannie Mae and Freddie Mac are supposed to maintain capital. Congress, in enacting the Safety and Soundness Act in 1992, established minimum capital requirements for the Enterprises and those standards have been in place for the past 25+ years. That Act requires the Enterprises to maintain minimum capital that is greater than or equal to:

  • 2.5 percent of on-balance sheet assets, which include mortgage-backed securities (MBS), mortgage loans, and other investments the Enterprises hold in their respective investment portfolios;
  • 0.45 percent of the unpaid principal balance of outstanding MBS not included in on- balance sheet assets, which include MBS the Enterprises issue and guarantee, but do not own and hold in their investment portfolios; and
  • 0.45 percent of “other off-balance sheet obligations.”

Well, the required capital for Fannie Mae and Freddie Mac clearly did not protect their shareholders from a catastrophic failure in 2008 due to declining home prices and a surge in mortgage delinquencies.

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In fairness, Fannie and Freddie are not depository institutions. But the sheer size of their loan portolios is worrisome.

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Whether you want to call Fannie and Freddie SIFIs or G-SIBs, they should have been called to testify as well.

Regulation of G-SIBs

Under the Dodd-Frank Act, all depository institutions with more than $10 billion in assets, including the U.S. G-SIBs, are supervised by the Consumer Financial Protection Bureau for compliance with consumer financial protection laws and regulations. Furthermore, the Dodd-Frank Act subjects the largest banks, including the U.S. G-SIBs, to heightened oversight and enhanced prudential standards to safeguard the U.S. financial system, which are implemented by the Federal Reserve. These requirements include enhanced capital, liquidity and leverage requirements, as well as regular stress testing to ensure banks hold enough capital to survive a future economic downturn or financial crisis. The G-SIBs are also required to submit resolution plans (also referred to as “living wills”) to ensure their firms can be resolved in an orderly way if they were to fail.

There have been several deregulatory developments and proposals in recent years. For example, S.2155, which was signed into law in May 2018 (Public Law 115-174), reduces the frequency of G-SIB stress tests, and it reduces other capital and leverage requirements. In addition, regulators have been advancing their own proposals. In April 2018, the Federal Reserve issued a set of proposals to simplify its capital rules for G-SIBs and introduced a “stress capital buffer,” or SCB, which would in part integrate the forward-looking stress test results with the Board’s non-stress capital requirements. The Federal Reserve joined the OCC in releasing a second proposal to substantially revise the current enhanced supplementary leverage ratio (eSLR) that applies to G-SIBs. After the proposal was released, former FDIC Chairman Martin Gruenberg said, “Strengthening leverage capital requirements for the largest, most systemically important banks in the United States was among the most important post crisis reforms…the amount of tier 1 capital required under the proposed eSLR standard across the lead IDI subsidiaries would be approximately $121 billion less than what is required under the current eSLR standard to be considered well-capitalized” (emphasis added). In response to a request from Committee staff for more information, the FDIC estimated the eSLR proposal would lower capital requirements for the primary federally-insured bank subsidiary of each G-SIB as follows:

● JPMorgan Chase & Co.: $34.597 billion (20.83% reduction in tier 1 capital) ● Citigroup: $26.978 billion (23.3% reduction)
● Bank of America: $22.838 billion (18.5% reduction)
● Wells Fargo: $20.406 billion (16.9% reduction)
● Bank of New York Mellon: $5.911 billion (33.65% reduction)

● State Street: $5.346 billion (37.5% reduction)
● Morgan Stanley: $2.507 billion (25% reduction)
● Goldman Sachs: $1.93 billion (9.49% reduction)

Despite proposing to reduce capital for the G-SIBs, the Federal Reserve’s own research has indicated current capital requirements are on the lower end of requirements that best balances benefits associated with mitigating systemic risk with a bank’s funding costs. Furthermore, the Federal Reserve has also been working on making stress testing more transparent to banks, potentially undermining the value of the regular exercise. Bank regulators have also proposed reducing enhanced prudential standards and liquidity requirements for banks as large as $700 billion, and there have been reports that regulators may reconsider their proposal on the Volcker Rule and propose further rollbacks of Dodd-Frank reforms.

Finally, while the Dodd-Frank Act and related reforms required additional capital and strengthened oversight of G-SIBs through the creation of the Consumer Bureau, there remain concerns regarding whether some of these institutions are adequately being held accountable for repeated consumer violations, and whether these firms may be too big to manage, as was discussed at the Committee’s hearing on March 12, 2019, with Wells Fargo’s former CEO, Tim Sloan.

Fannie Mae and Freddie Mac’s regulator is proposing that the mortgage-finance giants have a combined capital buffer of as much as $180.9 billion should the companies be released from government control.

I would really like to hear what new-minted FHFA Director Mark Calabria has to say on capital requirements and administrative reform.  And turning Fannie and Freddie loose again in the financial system.

Hopefully Calabria will be fixing the holes in the mortgage system.

 

D.C. Office Market Posts Strong Q1 As Coworking Demand Counteracts Law Firm Consolidation As Mall Vacancies Skyrocket

The topsy turvy world of commercial real estate!

First, vacancy rates are rising fast in US shopping malls. Not surprising given the consumer trend towards on-line shopping.

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Second, coworking demand is leading to a changing face of office spaces. Take Washington DC, for example.

The continued expansion of coworking companies drove strong absorption in D.C.’s office market in the first quarter, counteracting negative forces such as consolidation of law firm footprints and a slowdown in federal government leasing. 

Of course, San Francisco leads the US is most coworking spaces, followed by Miami, Atlanta and Washington DC.

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Speaking of commercial real estate and CMBS. the five largest loan losses in the CMBS space were reported by Trepp. Not surprising, the leader in March 2019 is a shopping center.

The REO Independence Mall asset accounted for 66% of the total realized losses for the month with a write-off of $149.7 million. That loss ate into 74.9% of the $200 million face amount tied to the asset, and is the largest loss ever incurred by a retail CMBS loan. Located in suburban Kansas City, Missouri, Independence Center is a 1 million-square-foot superregional mall and 398,000 square feet of that space served as collateral. The mall was sold to California-based International Growth Properties for $63.3 million last month, which marked a significant discount from its most recent valuation of $104.5 million. Following a maturity default in May 2017, special servicer commentary revealed that increased competition and economic challenges made it difficult for tenants to increase sales at the property. The loan represented 52.4% of the remaining collateral behind the WBCMT 2007-C33 deal. That deal has now lost 11.5% of its original balance to disposals.

Whoomp. There it is!

 

Rollercoaster! Global Economic Growth (G10, US, Emerging) Sliding Down Together

The global economy is in a rollercoaster pattern.

And unfortunately the G10, US and Emerging nations are on the downward side.

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This might explain Larry Kudlow’s call for a 50 bps drop in the Fed Funds Target Rate. At least Trump’s nominee for The Fed’s Board of Governors was previously the President of the Kansas City Federal Reserve. And CEO of Godfathers Pizza! Conditional on the US Senate approving his appointment, “Welcome to the party, pal!”