Treasury Yield And Dollar Swaps Curve Remain Kinked (So Many Uncertainties, So Little Time)

One day it looks like China and the US are making progress in trade talks, the next day there is no progress. Just like Brexit — on one day, off another. Then there is the Federal Reserve: will they continue raising their target rate and unwinding their balance sheet? Will the Democrats controlled House try to impeach Trump for putting ketchup on his steaks? And “The Wall.” Same old, same old. So many uncertainities.

Hence it is not a surprise that the US Treasury yield and US Dollar Swaps curve remain “kinked”. That is, inverted in the short-end of the respective curves.

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It is difficult to keep one’s head on straight with all the uncertainties in the global markets.

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Fannie-Freddie Soar on FHFA Chief’s Conservatorship Comment (What Is Hip?)

Joseph Otting is the acting director of FHFA while Mark Calabria is Trump’s nominee to be the new FHFA director and Fannie Mae – Freddie Mac regulator.

(Bloomberg) — Fannie Mae and Freddie Mac shares soared Friday amid fresh reports that the Trump Administration is working on proposal that would recommend freeing the mortgage-finance giants from government control.

Joseph Otting, acting director of the Federal Housing Finance Agency, commented on the administration’s plans at an internal gathering to introduce himself to staff and establish open lines of communication, an FHFA spokesperson said in a statement. MarketWatch reported on the meeting earlier Friday.

Otting mentioned, as he previously has, that the Treasury Department and the White House are expected to release a broad plan for housing that will include details about reform and will likely include a recommendation for ending Fannie and Freddie conservatorships, the FHFA spokesperson said. Treasury Secretary Steven Mnuchin has said that the Trump administration wants to end government control of the companies, and Otting intends to work to advance that plan, the spokesperson said.

Shares of Fannie rose more than 31 percent to $2.37 and Freddie Mac climbed 24 percent to $2.25 at 2:05 p.m. in New York. The increases were the biggest since November 30, 2016, when then-Treasury Secretary nominee Mnuchin first said getting the companies out of the government’s grip was a priority.

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Investors in the two companies, which have been under U.S. control since the 2008 financial crisis, have been optimistic that President Donald Trump’s appointees at Treasury and FHFA will allow them to reap a windfall by ending the conservatorship. Hedge funds, including Paulson & Co. and Bill Ackman’s Pershing Square Capital Management, are among the companies’ biggest shareholders.

Fannie and Freddie don’t lend. Instead, they underpin the mortgage market by buying loans from banks, packaging them into securities and making guarantees to investors in case borrowers default.

The statement by Otting, who is serving as interim FHFA director in addition to heading the Office of the Comptroller of the Currency, corroborates earlier reports that the administration is working on a plan. Still, the FHFA spokesperson didn’t offer details on what might be included in any proposal, such as whether Treasury would call for releasing the companies without Congress passing legislation.

Mnuchin has long promised to deal with Fannie and Freddie but two years into the Trump administration he has yet to outline specific steps he wants to take. That’s prompted many lobbyists and housing-policy analysts to question whether there’s an urgency to take bold measures.

Walt Schmidt, head of mortgage-backed securities research at FTN Financial, said he’s skeptical the White House would want to mess with U.S. housing policy with Trump gearing up for a re-election campaign. Any plan could be received poorly, underscoring the fact that the issue poses political risks with uncertain upside.

“The whole GSE system and conservatorship is fairly intractable because of the political ramifications around housing,” Schmidt said. “I don’t know why the administration would want to upset one of the pillars of our economy so significantly going into the next presidential election.”

Will Mark Calabria rock the housing finance boat? Mark is a seasoned DC insider and has worked with the National Association of Homebuilders, so he knows the importance of housing to the US economy. I haven’t talked with Mark since we ate dinner at BLT Steakhouse in DC a while ago when he was still at The Cato Institute.

But will Fannie and Freddie be set free as in  “Let my GSEs  people go.”  Or will Calabria shut them down and turn over housing finance to the largest banks for mortgage origination  (in this case, Quicken Loans)?

It is difficult to tell if anything will be done. It also be could be the Zandi/Parrot model of expanding Fannie/Freddie’s role in mortgage markets or Calabria’s notion of shrinking their footprint. It really depends on “What is hip?” in Washington DC.

Below is Mark Calabria  pleading  to Let Our GSEs Go!. Or will he?

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Shutdown! Dow Up 12.8% Since Federal Government Shutdown, Volatility (VIX) Down 50%

The Beach Boys sang it best: Shutdown!

The Dow Jones Industrial Average has risen 12.8% since The Federal government’s partial shutdown starting just before Christmas 2018. But since December 26th (the day after Christmas), the Dow has shot up 12.8%. And the S&P500 volatility index, the VIX, has declined by 50%.

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Its fun, fun, fun for investors. But for nonessential Federal employees, Don’t Worry, Baby because you will receive back pay as soon as the shutdown is over.

Meanwhile, “Help Us Nancy and Chuck” and end the shutdown.

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Quantitative Frightening? VIX 1Y Implied Volatility Declines To Lowest Level Since 2014 As Fed Lets Balance Sheet Unwind

There is a lot of fear and uncertainty in financial markets: the US Federal government shutdown, May’s Brexit defeat, trade anxiety with China, postponement of Nancy Pelosi’s entourage 7-day excursion to Brussels, Egypt, and Afghanistan, the Mexican border wall, etc.

But given all the fear and uncertainty in financial markets, the VIX 1-year implied volatility has actually been declining … and its decline coincides with The Fed’s Quantitative Frightening (QF) or the shrinking of The Fed’s balance sheet.

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Quantitative frighening or numbness?

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China’s Central Bank Now Has World’s Largest Balance Sheet As $1.1 TRILLION Is Injected Into Markets Via Repos (Curves Kinked)

China’s central bank, the People’s Bank Of China, now has the world’s largest balance sheet topping even the European Central Bank (ECB). Only The Federal Reserve is shrinking its balance sheet … for now.

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The PBOC has injected almost $1.1 trillion in the market over the past two days.

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One of the impacts of the balance sheet expansion and repo injections is a reduction in the volatiilty of Chinese stocks. Better known as “numbing volatility.”

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On the sovereign side, China’s yield and swaps curves are kinked.

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Central bank interfernce in markets seem to be never ending.

Greet the 1970s with the new victories of revolution and production, 1970. From a private collection.

US Treasury Yield, Swaps And 1-Month LIBOR Curves Remain Kinked (All Day And All The Night)

Global uncertainites abound. And with them, the US TReasury yield curve, the US Dollar Swaps curve, and the 1-month LIBOR curves are all kinked.

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These curves are kinked all day and all the night.

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Residential Mortgage Refinancing Applications Spike As Mortgage Interest Rates Decline (Purchase Applications Spike Even More!)

Mortgage applications increased 13.5 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 11, 2019.

.The Refinance Index increased 19 percent from the previous week to its highest level since March 2018. The seasonally adjusted Purchase Index increased 9 percent from one week earlier to its highest level since April 2010. The unadjusted Purchase Index increased 43 percent compared with the previous week and was 11 percent higher than the same week one year ago.

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You can see the spike in refi apps coinciding with a decline in 30-year mortgage rates.

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And you can see an even large spike in mortgage purchase applications with the decline in mortgage interest rates.

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Fannie Mae’s 30Y current coupon rate has declined and is lower than it has been for most of 2018.

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Bye Bye Theresa? Britain’s PM May Loses Brexit Vote By 432 To 202 (Disturbance In The Force)

I detect a disturbance in The Force after Great Britain’s Therese May lost the Brexit vote by a whopping 432-202.

The USD Dollar Swap curve is now even more kinked  and the GBPUSD forward curve looks like it hit a wall.

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It is almost as if the Brexit “fears’ have gone away.

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Is this Bye Bye Theresa?

Meanwhile, Nigel Farage and UKIP are singing “What’s the matter with UK Socialists?”

Oh Canada! 58% Of US Stocks Have Negative Annual Free Cash Flows (82% Of Canadian Stocks)

Typically, a company with negative free cash flow indicates an inability to generate enough cash to support the business. Free cash flow tracks the cash a company has left over after meeting its operating expense.

But when 58% of the United States stockss have negative free cash flows … we got trouble in River City.

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But Canada is even worse at 82%.

Oh Canada!

10-Year US Treasury Yield In “Death Cross” Pattern (Yields Falling With Fed Unwind)

In a positive technical sign for bond bulls, the U.S. 10-year Treasury yield has formed a so-called death cross pattern. This occurs when the 50-day moving average crosses below its 200-day counterpart. While many traders are skeptical of its relevance, others argue it presages further weakness in the benchmark yield. “It should indicate long-term yields will continue to head lower as we move through the first quarter,” wrote Miller Tabak + Co. equity strategist Matt Maley, in a note to clients.

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As The Fed continues to unwind its balance sheet, 10-year Treasury yields, on average, have been falling (not rising).

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