Today's Tidbits

Foreign Investors in U.S. Treasuries See Dollar Profits Wiped-Out by FX Losses
From Bloomberg: “Treasury investors basking in the biggest rally in four years have reason to fear for their profits: The largest owners of U.S. government debt are heading
for the exit. Two-year Treasuries returned 1.09 percent in August, the best monthly performance since 2003, according to indexes compiled by Merrill Lynch & Co. At the same time, holdings of U.S. bonds by governments and central banks at the Federal Reserve fell 3.8 percent, the steepest decline since 1992. The dollar's slump to a 15-year low against six of its most actively traded peers is turning the gains into losses for international bondholders, prompting China, Japan and Taiwan to sell. Overseas investors own more than half of the $4.4 trillion in marketable U.S. government debt outstanding, up from a third in 2001, according to data compiled by the Treasury Department. `The support that Asia has shown in buying U.S. Treasuries has been a major supporter of keeping long-term interest rates lower than where they probably would be,”…U.S. long-term interest rates would be about 90 basis points, or 0.90 percentage point, higher without foreign government and central bank buyers, according to a 2006 study for the Fed by Professors Francis and Veronica Warnock at the University of Virginia in Charlottesville … Treasuries returned 5 percent in the past two months …The dollar fell 8 percent against the yen in the past two months, causing losses for Japanese funds that own Treasuries…Government and central bank holdings of U.S. government debt at the Fed fell by $46.1 billion from the week ended July 25 to the week ended Sept. 5. They climbed to a record $1.25 trillion in July from $574 billion in June 2001. Japanese investors, who held $612 billion as of June 30, are on course to cut for a third year, according to the Treasury. China trimmed its U.S. debt by 3.4 percent in the second quarter to $405 billion, the first reduction in three years. Taiwan pared by 10 percent in the past year to $57.5 billion, while South Korea slashed holdings 25 percent this year to $50 billion…Merrill Lynch's main index of U.S. government securities returned 3.3 percent for July and August. For investors in Japan, the biggest holders outside the U.S., the index lost 3.1 percent after accounting for changes in the currency.”

Estimates of ARM Borrowers Able to Refinance into Various FHA Loan Options
From Lehman: “Upwards of $100 billion ARMs per quarter are slated for reset through the end of 2009, the vast majority of which are subprime…Only 8% of the total at-risk reset population falls within the $362,000-$417,000 bucket and just a fraction of these borrowers meet the FHA current underwriting …raising the loan limits (while keeping other underwriting criteria constant) results in just $1 billion of additional at-risk borrower eligibility in all of 2008…Even if there were no loan limit constraints, just $4.1 billion of additional at-risk borrower loans could be refinanced into FHA loans…Of the $207 billion at-risk ARMs resetting in 2008, we estimate that $24 billion qualify under existing standards… Roughly 30%-40% of troubled subprime borrowers could potentially refinance into an FHA loan if DTI and documentation constraints were also relaxed…if the FHA were to expand eligibility to borrowers with CLTV > 97 but held all other constraints constant, it would only facilitate refinancing for an incremental $3-$4 billion per year of at-risk subprime loans…at most approximately $90 billion of troubled
subprime borrowers scheduled to reset in 2008 would qualify for an FHA loan…a more realistic assumption is a maximum of $55-$65 billion…”

MISC

From Bloomberg: “Borrowers are paying the highest costs in six years for commercial paper, IOUs maturing in 270 days or less, because of losses from assets related to subprime mortgages. The yield in the U.S. has soared to 6.33 percent for 30-day debt from 5.48 percent on Aug. 9.”

From Bloomberg: “Eleven metropolitan areas have median home prices of more than $417,000, the limit for mortgages guaranteed by government- chartered agencies Fannie Mae and Freddie Mac. The markets are San Jose, San Francisco, San Diego, Los Angeles and Orange County, California; New York City; parts of northern New Jersey; southern Connecticut; Long Island; the Washington metropolitan area and Honolulu.”

From Goldman Sachs: “India: It’s raining growth—increasing our GDP forecasts for FY2008 and FY2009… We are increasing our GDP growth forecasts for FY2008 to 8.7% from 8% and for FY2009 to 8% from 7.8%...”

From Reuters: “The average retail price of a gallon of gasoline in the United States cost about 6.5 cents more last week, rising for the first time since early July on the back of higher crude oil prices… Gasoline prices are up about 15 cents from a year ago, but remain about 37 cents per gallon below the all-time U.S. average high of $3.1827 on May 18…”

From Bloomberg: “U.S. consumers borrowed less in July than a month earlier as Americans took our fewer auto loans. Consumer credit increased $7.5 billion during the month to $2.46 trillion, the Federal Reserve said…In June, credit rose $11.9 billion, less than previously reported. The figures don't include mortgage debt. Auto sales slumped to a two-year low in July, capping the weakest quarter of consumer spending since the last three months of 2005. Slumping home values and stricter lending standards have made it harder for Americans to borrow against their homes for extra cash, suggesting more and more will turn to credit cards to finance spending. ``Credit cards continue to perform fairly well,'' Chris Low, chief economist at FTN Financial in New York, said before the report. ``Car loans are another story altogether. Repossessions are rising, and sales are slowing.''

End of Day Market Update

From RBSGC: “The bond market got a bid from...we'll we're really not quit sure what sparked the bid. To be frank, the technical breakout after the fundamental breakdown on the jobs front (we refer, of course, to NFP) serves as a solid foundation. But specific to Monday we really didn't have new information per se to drive 10-yr notes, albeit briefly, under 4.30%. Ideas that come to mind include, 1) a sharp drop in stocks, 2) 1 month LIBOR as a proxy for liquidity remaining elevated near 5.80%, 3) convexity buying -- though we saw more of that Friday, yields are in our perceived zone, 4) somewhat less adamant Fedspeak -- less about the market dictating to the Fed and more about the risks and the NFP report warranting concern, and 5) the weekend press striking a nerve with reference to the NFP report and bandying about the word 'recession' rather freely. Flows were another thing. Volume was tame…”
From Barclays: “Treasury yields are at their lowest levels in more than two years. At 140 bp through Funds, 2 yr Treasuries are pricing in an aggressive and sustained easing cycle by the Fed. In comparison, 2s rallied only about 110 bp through the target rate before easing commenced in September 1998.”
From UBS: “Treasuries rallied out of the gate, and yields fell 4-5bps across the curve as last Friday's shock drop in employment lingered…In a speech nearly identical to his remarks last Thursday, Atlanta Fed President Lockhart said that there are no conclusive signs of weakness in the broader economy as a result of housing, but acknowledged that employment has been weakening since June. Yellen, on the other hand, sees significant risk when housing prices fall in the context of rising unemployment. Meanwhile, Dallas Fed President Fisher expressed relative optimism about the state of the economy. We'd LOVE to be a fly on the wall for the upcoming FOMC meeting…Swaps saw good receiving in the belly (some further convexity receiving), and spreads were mixed on the day. Agencies saw very little flow, with some buying in the front end but nothing out of the ordinary. Mortgages also were quiet today, with small duration buying by servicers. MBS finished 1-2 ticks wider to Treasuries and swaps.”
Dow closed up 14, Dollar Index down .12 to 79.84, and oil rallied 79 cents to $77.49.