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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Divergence! Hong Kong’s HIBOR/LIBOR Spread Largest Since Financial Crisis While PBOC’s Balance Sheet Diverges From US Fed’s (China Default Crisis?)

There is considerable divergence between China and the US in terms of financial condition. The trade disagreement between China and the US comes to mind.

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First, there is considerable divergence between Hong Kong’s 1-month interbank lending rate, HIBOR, and the US 1-month interbank lending rate LIBOR. In fact, the divergence is the greatest since the financiak crisis. For the moment, the US Fed is engaged in quantitative tightening (QT) while China is frantically going the opposite direction.

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Second, Central bank balance-sheet divergence is reducing the impact of China’s government-induced liquidity injections, contributing to an increase in corporate defaults. Since Fed run-off began in October 2017, the impact of People’s Bank of China (PBOC) balance-sheet expansion has diminished considerably, as the FX-adjusted effect of last year’s 1 trillion yuan in central bank stimulus resulted in a $160 billion contraction when converted into U.S. dollars. Total assets at China’s central bank rose 2.6% to a record 37.2 trillion yuan in 2018. Yet, when expressed in dollars, the PBoC’s balance sheet fell by 2.9% to $5.4 trillion.

Chinese onshore defaults rose to a record $16.5 billion in 2018, and are up $1.4 billion year-to-date. China offshore defaults rose to $3.3 billion in 2018, and are up another $275 million in 2019.

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The Dow is up over 200 points on a deal preventing a US government shutdown. Democrats agreed to build a wall between the US and Mexico … 55 miles of the 2,000 mile US-Mexico border. As if drug traffickers (and cartels), human traffickers and gangs like MS-13  can’t figure out how to bypass the 55 miles of additional walls. 

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Existing Home Sales Plunge 10.25% In December As Global Economy Is Slips Into Darkness

And no, that was not a seasonal effect. Existing home sales declined 6.4% MoM in December, the largest decline since November 2015.

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And on a YoY basis, existing home sales plunge 10.25%.

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US existing homes are very expensive compared to household income and the surge in mortgage rates during 2018 made housing ever less affordable.

The median price for existing home sales shows a seasonal pattern with June typically being the highest for the calendar year and January being the lowest.

Let’s see how Euro Zone and Japan slipping into darkness impacts the US econony and housing market.

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Student Debt Is a Driver of Low Millennial Homeownership (Combined With Declining Middle Class Wealth)

American homeownership has been on the decline (for millenials), and Federal Reserve researchers point to the high cost of college as one culprit. (Gee. ya think?)

Just 36 percent of household heads between 24 and 32 years old owned homes in 2014, down from 45 percent in 2005. At the same time, average student debt per capita rose to an inflation-adjusted $10,000 from $5,000 in 2005.

About 20 percent of the decline in homeownership among young adults can be attributed to that increase in student loan debt, the authors estimate, making such borrowing an important, but not central, driver of the decline. Some 400,000 more young people would have owned homes in 2014 if debt burdens hadn’t risen.

Average college tuition, fees, room, and board was $4,399 for public colleges in 1995-1996 and $2,081 for community colleges. By 2015-2016, costs were $9,410 and $3,435, respectively, increases of 53 percent and 65 percent. Student aid increases failed to slow down high tuition costs.

Why does this happen? It’s partly because higher student loans early in life leads to lower credit scores later in life, making it harder for former students to take out mortgages.

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But HOW did this happen? It started with President Bill Clinton and his crusade to make college more affordable. Clinton bumped up student financial assistance funding by 20 percent before he left office and introduced direct federal student loans, along with tax credits to further defray costs. Somewhat ironically, Clinton set the stage for student loans to dominate higher education funding.

And since Clinton, college tuition has grown almost exponentially. And then President Obama doubled down on the “make college more affordable” lunacy.

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Despite the fact that middle-class wealth has collapsed since 2007.

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Where do the tuition hikes go? Generally to university administrators, like Presidents, Provosts, Deans (and Deputy, Associate and Assistant Deans). And new non-academic initiatives. 

So where do (overpaid) university adminstrators go after work?  Bump City!

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