US New Home Sales Surge 16.6% For May Thanks To Historic Low Interest Rates (Will The Fed Wave Into Negative Interest Rates?)

New home sales rose 16.6% MoM in May, a pleasant surprise for the US economy. This is nearly the exact opposite of yesterday’s existing home sales plunge of nearly 10% MoM in May.

(Bloomberg) – Prashant Gopal – New home sales in the U.S. rose more than expected in May, with record-low mortgage rates pulling buyers back into a housing market that froze up during the pandemic.

Purchases of single-family houses climbed 16.6% to a 676,000 annualized pace, government data showed Tuesday. The median forecast based on a Bloomberg Survey of economists was for 640,000.

Homebuilders are welcoming buyers back after social-distancing rules across much of the U.S. kept them on the sidelines in March and April. A growing share of buyers are opting for new homes because existing home listings are in short supply. Record-low interest rates have made the properties affordable to a larger share of buyers.

With the Taylor Rule at -11%, will The Fed venture into negative nominal rates?

US Housing Starts Crash In April Thanks To COVID-19 Lockdown (Despite Declining Mortgage Rates)

US housing starts in April crashed to their lowest level since 2015 despite near-record low mortgage rates.

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1-unit starts declined 25.4% from March to April. But it is the 5+ unit starts (apartment) that suffered a 40.31% MoM decline.

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It appears that The Fed’s snake juice isn’t working.

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Federal Reserve To Provide Up To $2.3 Trillion In Loans To Support The Economy (Fed Seizes Control of Entire U.S. Bond Market)

The Fed Seizes Control of Entire U.S. Bond Market!

The Federal Reserve on Thursday took additional actions to provide up to $2.3 trillion in loans to support the economy.This funding will assist households and employers of all sizes and bolster the ability of state and local governments to deliver critical services during the coronavirus pandemic.

“Our country’s highest priority must be to address this public health crisis, providing care for the ill and limiting the further spread of the virus,” said Federal Reserve Board Chair Jerome H. Powell. “The Fed’s role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible.”

The Federal Reserve’s role is guided by its mandate from Congress to promote maximum employment and stable prices, along with its responsibilities to promote the stability of the financial system. In support of these goals, the Federal Reserve is using its full range of authorities to provide powerful support for the flow of credit in the economy.

The actions the Federal Reserve is taking today to support employers of all sizes and communities across the country will:

  • Bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program (PPP) by supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility (PPPLF) will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value;
  • Ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans through the Main Street Lending Program. The Department of the Treasury, using funding from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) will provide $75 billion in equity to the facility;
  • Increase the flow of credit to households and businesses through capital markets, by expanding the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) as well as the Term Asset-Backed Securities Loan Facility (TALF). These three programs will now support up to $850 billion in credit backed by $85 billion in credit protection provided by the Treasury; and
  • Help state and local governments manage cash flow stresses caused by the coronavirus pandemic by establishing a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities. The Treasury will provide $35 billion of credit protection to the Federal Reserve for the Municipal Liquidity Facility using funds appropriated by the CARES Act.

In addition, on April 9, 2020, the Federal Reserve announced additional measures to support the economy amounting to as much as $2.3 trillion in liquidity. Among their actions, the Term Asset-Backed Securities Loan Facility (TALF) will now include legacy commercial mortgage-backed securities (CMBS) as eligible collateral. Eligible CMBS securities must have been issued prior to March 23, 2020, while securities related to other asset classes are only eligible if they were issued after this date.

TALF Specifics for CRE

The TALF term sheet specifies the following for the commercial and multifamily real estate loan/securities markets:
The underlying credit exposures for CMBS must be to real property located in the United States or one of its territories;
CMBS securities related to single-asset single-borrower (SASB) and commercial real estate collateralized loan obligations (CRE CLOs) are not eligible at this time.

TALF provides three-year loans to investors of CMBS and other eligible collateral. Haircuts and other terms can be found on the Fed’s website.

Mortgage REITs were pleased by the news!!

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But remember the old proverb, “There’s many a slip ‘twixt the cup and the lip.” Or “Don’t count your chickens before they hatch.”

 

 

The Fed’s Bigger Boat! Is The Fed’s Cure Worse Than the Covid-19 Virus?

Apparently, The Federal Reserve and US Treasury think they need a bigger boat!

(Bloomberg) — The economic debate of the day centers on whether the cure of an economic shutdown is worse than the disease of the virus.  Similarly, we need to ask if the cure of the Federal Reserve getting so deeply into corporate bonds, asset-backed securities, commercial paper, and exchange-traded funds is worse than the disease seizing financial markets. 

In just these past few weeks, the Fed has cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook. That wasn’t enough to calm markets, though — so the central bank also announced $1 trillion a day in repurchase agreements and unlimited quantitative easing, which includes a hard-to-understand $625 billion of bond buying a week going forward. At this rate, the Fed will own two-thirds of the Treasury market in a year.

But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:

CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.

PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.

TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.

SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.

MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-size businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position.

What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.

In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.

Here is part of the mayhem The Fed/Treasury are trying to mitigate. The CitiMortgage Alternative Loan Trust 2007-A4 asset-backed security.

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Yes, the US Treasury curve is now below 0.75% from 10 years in, including negative yields on most Treasury bills.

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The US Treasury actives curve and On/off the run curves are under 1% at 15 years and in.

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Welcome to Amity Island, in a shutdown over the Corona-19 virus.

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Mr Freeze! U.S. Mortgage Rates Slip While Home Sales Head for Deep Freeze (Unemployment Claims Hit All-time High!)

Deep freeze?

(Bloomberg) — U.S. mortgage rates fell for the first time in three weeks. But for would-be homebuyers frozen in fear of an economic meltdown, borrowing costs are no longer a prime concern.

The average rate for a 30-year fixed loan was 3.5%, down from 3.65% last week, Freddie Mac said in a statement Thursday.

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Unemployment claims jumped today to the highest ever.

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Pennsylvania and Ohio lead the nation in unemployment (jobless) claims.

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Did someone say Deep Freeze?

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Mortgage Hedging Sputters, Sapping Energy Behind Treasuries (Fed Tapped Out)

I had to read this Bloomberg headline several times: “Locust Swarms Ravaging East Africa Are the Size of Cities”

Are the swarms the size of cities or the locusts? If so, those are some pretty big locusts!

But on to Treasury / MBS news.

(Bloomberg) — The mortgage market helped fuel U.S. Treasury yields as they rocketed toward historic lows in 2019. Don’t expect a repeat in 2020 because that propellant appears to be tapped out.

Homeowners refinanced loans in droves last year as they sought to lock in lower rates. As the original loans disappeared, investors in mortgage-backed securities bought swaps to get their newly out-of-whack portfolios back in order. Such convexity hedging tends to drive Treasury yields down. That dynamic was especially prominent in March 2019 as rates on 10-year notes sank 31 basis points after a surprise Federal Reserve policy shift.

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Today, the relationship appears to have weakened. A Bloomberg Barclays index of MBS portfolio duration has fallen since the beginning of this year, but longer-dated swap spreads have held steady. This decoupling is evidence that hedging flows are now not likely to crater yields. The index closed down at 2.65 on Tuesday, a third consecutive daily drop.

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So, The Fed seems tapped out.

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And is having trouble making markets dance.

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