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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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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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 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).

 

Dust Their Brooms: Should Lehman Bros Have Been “Surprised” By Their Sudden Illiquidity? (Bear Stearns Then Fannie Mae And Freddie Mac’s Stock Price Already Plunged)

Movies like “Margin Call” and “The Big Short” make the financial crisis look like a total surprise … to them. Well, it wasn’t a surprise to GSEs Fannie Mae and Freddie Mac. Their common stock prices (green line) began plummeting in December 2007. Lehman Bros stock price didn’t start plummeting until February 2008.

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Why? National home prices had peaked in 2006 and had slowly begun to retreat. But as of December 2007, the Case-Shiller national home price index had fallen 17.4% from the peak in 2016. Subprime delinquencies had risen 46.5% over the same period. U-3 unemployment started rising in a big way in 2008.

But as home prices nosedived in 2008, subprime delinquencies skyrocketed. You can see Fannie Mae’s large drop in price in November 2008 (while they didn’t purchase subprime loans in high volume, they did invest in subprime ABS and ALT-A loan deals). While ALT-A turned out to suffer big losses, they performed better than subprime after the intial subprime spike.

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On September 6, 2008, Fannie Mae and Freddie Mac were placed into conservatorship with their regulator, FHFA and remain there ever since. Also in September, Lehman Bros declared bankruptcy … afer Fannie Mae and Freddie Mac were placed into conservatorship.

*There was other lenders that failed or had to be absorbed elsewhere, like Countrywide, and Wachovia.

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But Fannie Mae, Freddie Mac and Lehman Bros demise came AFTER Bear Stearns demise in March 2008, owing to subprime deal failures. In fact, you could see trouble brewing shortly after home prices started to fall. By 2007, both Bear and Lehman were showing distress, but not Fannie Mae. Fannie Mae and Freddie Mac’s regulator, FHFA saw the warning signs with subprime and took action on September 8th (maybe prematurely since they could have continued).

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Congress bailed out the banks and Fannie Mae and Freddie Mac and swept the financial dust away (aka, dust their brooms).

Just look at the above chart. Starting in 2016, risk managment at all financial firms should have been on yellow alert. By Q4 2007, it should have been upgraded to red alert. How is it possible that Lehman Bros or Bear Stearns (or Goldman Sachs) were taken by surprise as Margin Call implied.

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Oh well.