From Bloomberg: “Senate Banking Committee Chairman Christopher Dodd said U.S. Federal Reserve Chairman Ben S. Bernanke agreed to use ``all of the tools at his disposal'' to restore stability in financial markets roiled by the subprime mortgage crisis … Dodd said he didn't specifically ask Bernanke to cut the benchmark federal-funds rate, and Bernanke didn't pledge to do so. Interest-rate futures show that traders are betting the credit crunch will force Bernanke to ease monetary policy for the first time since 2003.”
Fed Governor Lacker Says Give Markets Time to See If Fed’s Efforts Working
From Bloomberg: “Federal Reserve Bank of Richmond President Jeffrey Lacker said the impact of ``financial turbulence'' on the broader economy will determine decisions on
interest rates. ``Financial market volatility, in and of itself, doesn't require a change in the target federal funds rate,'' Lacker said at a luncheon of the Risk Management Association of Charlotte. ``Policy needs to be guided by the outlook for real spending and inflation.'' Lacker is the first Fed official to provide a detailed analysis of the economic and policy implications of the global market tumult that has spread beyond defaults and delinquencies in mortgage markets. His comments suggest he supports the Federal Open Market Committee's approach, which has addressed liquidity needs with policy tools other than the benchmark federal funds rate target… Lacker said the ``jury is still out'' on whether the Fed moves have eased trading problems in the market for asset-backed commercial paper. ``It is too soon to really make a judgment,''…”
Comparing Size of CP to T-Bill Markets
From UBS: “The money market instrument sector of the fixed income market has roughly $4.2 trillion in debt outstanding, or slightly less than the $4.5 trillion Treasury sector…According to Fed data about half of total money market instruments are commercial paper, or $2.13 trillion, and half of that commercial paper is asset-backed. The assets backing the commercial paper can range from car loans, bonds, trade receivables, credit cards to mortgage loans. Of the $1.2 trillion of ABCP currently outstanding, estimates are that 39% of it, or around $468 billion, is backed by mortgages or CDOs. To put that in perspective, according to Wrightson's (Treasury Finance, August 21st, 2007): "the supply of Treasury bills held outside the Fed is a little less than $700 billion." Subprime mortgage losses have driven money market investors away from mortgage-related commercial paper, into the safe harbour of T-bills. Despite seasonal highs in issuance, the Treasury bill market, overwhelmed by demand, saw 1m rates dive below 2.00%.”
From Deutsche: “While the moves in the Treasury bill market are dramatic, we don't think they have much import in themselves, since the bill market is highly technical and can be easily squeezed nowadays. But they are a symptom of the turmoil in the ABCP market, and the disposition of the conduits and their assets if they are no longer being funded. Eventually, the banking system will have to take on many of these assets and fund them, and that is where the Fed's discount window can provide a short term solution and legislative action a longer term one. By and large, the "eventual" underlying value of the conduit assets are likely still strong, since most subprime exposure is of the AAA variety. But the market illiquidity for the assets means that the existing system for realizing their value is dysfunctional and has to be replaced.”
Foreclosure Rate Rises Rapidly
From Bloomberg: “U.S. homes facing foreclosure almost doubled in July as property owners with adjustable-rate mortgages saw their payments rise, RealtyTrac Inc. said. Lenders sent 179,599 notices of default, scheduled auctions or bank repossessions last month, a 93 percent increase from a year earlier, Irvine, California-based RealtyTrac said today in a statement. California, Florida, Michigan, Ohio and Georgia accounted for more than half of the country's total filings…Forty-three states had year-over-year increases in foreclosure activity…California foreclosure filings totaled 39,013 in July, about triple the previous year. The state led the nation in foreclosure for the seventh consecutive month, RealtyTrac, a seller of foreclosure data, said. Florida ranked second with a 78 percent increase to 19,179 foreclosure filings. Michigan replaced Ohio as the state with the third highest number foreclosures: 13,979. Nevada ranked the worst with one foreclosure filing for every 199 homes, about three times the national average. Georgia's rate jumped from eighth to second highest in the country with one foreclosure filing for every 299 households.”[Please note 93% change was YoY not MoM as I incorrectly indicated this morning.]
Challenger Sees Rapidly Rising Job Losses Tied to Housing Market Troubles
From CNBC: “The deepening housing slump has caused an alarming surge in job losses at financial services companies, and the end is nowhere in sight, consulting firm Challenger, Gray & Christmas said on Tuesday. The industry has announced 87,962 job cuts so far this year, 75 percent more than the 50,327 recorded for all of 2006, Challenger said. Nearly one-fourth of this year's cuts have been announced in August alone. Of this year's cuts, 35,830, or 41 percent, were tied to housing market troubles, including riskier subprime mortgages. Job cuts set by real estate and construction firms total 21,620, more than twice the number for all of 2006, Challenger said. "Many companies expected the mortgage situation to implode; they've just been wondering when the bubble would burst," Chief Executive John Challenger said in an interview. "But many are stopping on a dime, shutting down operations," he said. "Companies are not surprised by what's happening, but the reality of the situation and the speed with which it occurred is shocking." The CEO said it could be months before housing-related job cuts peak.”
Fannie Mae Decided Not to Issue New Long-Term Benchmark Debt in August
From UBS: “Fannie Mae passed on issuing any benchmark notes in August [first pass since 5/06], stating that skipping the sale "allows us some additional flexibility to gauge investor interest and portfolio needs." This was a reasonable decision by Fannie for two reasons: first, they only have approximately $6 billion left of room before bumping up against their mortgage portfolio cap. They may be planning to allow some additional run-off before re-entering the market, which would keep their funding needs low for the time being. Second, agency debt has underperformed Libor across the curve over the past 6 weeks, and current GSE funding levels aren't especially attractive. For example, 10y agency debt was trading 17 to 20 bps through Libor as recently as May, but the credit crunch has driven it out to L-9 bps.”
Fed Lowers Cost of Borrowing Treasuries From Fed
From JP Morgan: “Today the NY Fed lowered the minimum fee on securities lending from the System Open Market Account (SOMA) from 1.0% to 0.5%. The move was designed to provide greater liquidity in the T-bill market, which has seen sharply lower rates as money funds have fled to the safety of the Treasury market. The securities lending program is designed to promote liquidity in the Treasury market by allowing the 21 primary dealers to borrow securities overnight from the SOMA's $785 billion portfolio of Treasuries. Borrowers are required to deliver collateral of other Treasuries and are subject to the minimum fee which was reduced today. The minimum fee rate is essentially the effective lending fee as most bids are awarded at the minimum fee. Because borrowers in the securities lending program deliver other securities as collateral, this facility does not alter the amount of reserves in the banking system.”
China Tries to Encourage Bank Savings Over Speculation in Property and Equities From MNI: “China's high housing prices are having a "major negative impact" on the country's economy, the State Information Center said. The government think-tank argued that excessive growth in housing prices has placed a burden on the people and widened the gap between rich and the poor.”
From Bloomberg: “The [Chinese] government is trying to make bank savings more attractive to stem the flow of money into property and stock speculation and curb asset bubbles…Inflation has outstripped returns on bank savings. The government reduced a tax on interest income last week to 5 percent from 20 percent to make deposits more attractive…The key CSI 300 Index has climbed 144 percent this year after more than doubling in 2006. Property prices have also surged. In July, housing prices jumped 19.4 percent in Shenzhen and 10.4 percent in Beijing.”
From Citi: “China hiked [the benchmark one year lending rate] for the fourth time [since March], which may add further [downward] pressure on commodities.”
Rumors Buffett Buying Countrywide Shares
From CNBC: “Billionaire investor Warren Buffett told CNBC… that speculation he may buy parts of beleaguered mortgage lender Countrywide Financial is just that, speculation. As always, Buffett never directly comments on what stocks he has bought or may be buying. Today's Wall Street Journal said Countrywide's debt-servicing business and its portfolio of mortgages and mortgage-backed securities may be attractive to Buffett. Like many mortgage lenders, Countrywide has struggled with rising delinquencies and foreclosures, and an unwillingness among bankers to extend credit, and among investors to buy the loans it makes. Countrywide, which is being closely monitored by U.S. regulators, sought to reassure investors earlier on Monday that it is safe to do business with the company. Buffett has been increasing his stake in financial services companies, including those with significant exposure to the mortgage market.”
From Bloomberg: “Countrywide added $1.98, or 10 percent, to $21.79.”
MISC
From Bloomberg: “More than half of the 21 primary government security dealers that trade with the Fed now expect the central bank to cut its target rate for by next month from the current level of 5.25 percent.”
From Citi: “…the Street is in balance sheet reduction mode, and as usual dealers tend to have all the same trades on and aggregates so things are getting pushed out of line or facing little resistance. We're seeing this across the curve, and across cash products…It seems though at this point, the bid to GC is mostly the flight by money-funds, retail investors into risk-free assets.”
From Merrill Lynch: “This is NOT a rate problem, it is a perceived credit problem. (I say perceived since most assets are "money good", the SubPrime "bad money" bonds are relatively small in the context of the global markets.) As such, cutting rates will not directly cure the market. The REAL issue is that Levered Investors have DISINTERMEDIATED the banking system from the FED. Portfolio lenders would never have created this menu of SubPrime loans if they had to own them. Brokers would not have been allowed to act so aggressively if the lenders could not sell the risk into market. Consequently, the FED needs to disipline the markets to restore the RISK PREMIUMS to rational levels. They need to let the "Invisible Hand" guide the markets to equilibrium. Cutting rates ala the "Greenspan Put" should be the last option, not the first.”
From MNI: “The 4-week T-Bill closed at around 2.1% yesterday, down 0.8% after
hitting an intra-day low of 1.25%, as investors shunned money market funds.”
From UBS: “3-month Treasury bills continued their remarkable run-up, rallying 74bps for the day, their largest one-day change since October 1987. At one point, 3M yields had fallen as much as 120bps on the day. Over the past four business days, the 3M yield was slashed 161bps, the largest four-day change in yield going as far back as we have data for.”
From JP Morgan: “Natural gas futures experienced the greatest sell-off in more than
four years on forecasts that Hurricane Dean will probably miss the oil and gas production regions of the Gulf of Mexico. The September contract settled down 97 cents on the day at $6.04. The sell-off far exceeded that of the petroluem complex in percentage terms due to the fact that natural gas rig activity was at a greater risk if the storm had taken a more northerly direction through the Gulf.”
From UBS: “House Financial Service Committee Chairman Frank (D-MA) also announced a hearing for September 5, titled “Recent Events in the Credit and Mortgage Markets and Possible Implications for U.S. Consumers and the Global Economy.” The witness list has yet to be announced.”
From American Banker: “Profits at the Chicago [Home Loan Bank] dropped 50% from a year earlier…in part because of problems with its mortgage program…”
From CNN: “Already-battered U.S. auto sales could be the next victim of the problems with mortgages, declining home and stock prices, as potential car buyers delay purchases due to uncertainty. Industrywide U.S. auto sales in August could be off 10 percent from a year ago, according to an early read from sales tracker Edmunds.com. That follows July sales that were 19 percent below year-earlier levels.”
From Dow Jones: “The asset-backed commercial paper market, where highly rated
lenders have gone for their short-term funding needs, is still broken despite the Federal Reserve’s attempt late last week to fix the logjam in this key part of credit markets. The Fed on Friday cut its discount rate by half-percentage point in an attempt to alleviate the pressure on banks that found their access to the commercial paper market shut off amid a crisis of investor confidence. “Apparently, the market’s worse today than it’s ever been,” said Dominic Konstam, head of interest rate strategy at Credit Suisse. “The big failure to roll HBOS paper in Europe has upset people.””
End-of-Day Market Update
From Lehman: “It was another wild day in treasury land, and the front end led the way despite a quiet and positive day for stocks and credit. Our market's focus has turned almost wholly to the money market, where dislocations in commercial paper, term repo, and Treasury bills continue to unnerve investors. Implied repo on ten year note futures continued to plunge, moving from 3.3% yesterday to a low of 2.3% today. T-bills remained the investment of choice for money market funds, and traded low this morning until the 4 week bill tailed 200 basis points (yes, 200 basis points) which sent bill rates sharply higher. The treasury curve was literally all over the place, steepening early, flattening on what appeared to be a massive flow at the front end midday, and then steepening back out again later on… Tuesday's yield changes were roughly as follows: 2 years: -7.2 bp 5 years: -4.5 bp 10 years: -4.6 bp 18 years: -3.9 bp 30 years: -2.7 bp
From Citi: Commentary on today’s 1m T-bill auction in the early afternoon- “They were trading at 2.50% at 12:59pm. Auction came at 4.75% at 1:00 pm. They are now 3.50% bid at 3.25%. Financial markets are not working too well when you have this kind of volatility around a 4 week bill auction...” See graph at end for daily movement
From UBS: “Agency spreads outperformed swaps by 1-2bps in the front end, and were unchanged in the long end. Mortgages were 7 ticks tighter to Treasuries early on, but faltered later in the day to finish only 1 tighter.”
From Bloomberg: “The S&P 500 increased 1.56, or 0.1 percent, to 1,447.11. The
Dow Jones Industrial Average slipped 30.49, or 0.2 percent, to 13,090.86. The Nasdaq Composite Index climbed 12.71, or 0.5 percent, to 2,521.3. About six stocks rose for every five that fell on the New York Stock Exchange.”
From Dow Jones: “The dollar held firm above Y114.0 throughout the session and was little changed against the euro from day-earlier numbers.” [ The dollar index rose .08 to 81.48]
From Bloomberg: “Crude oil fell below $70 a barrel in New York for the first time since July 2 after Hurricane Dean missed U.S. oil fields and was downgraded to a Category 2 storm by the U.S. National Hurricane Center… ``There's a growing confluence of events that point to the economy being due for a correction,'' Beutel said. ``The credit crunch is a symptom of consumer fatigue, which is in large part due to high commodity prices, especially energy.''” [Oil closed down $1.65]
Graph of 1 month generic T-Bill yield for today
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