Today's Tidbits

ABX Index Prices in “Housing Armageddon”
From JP Morgan: “October month-end valuations will be the most punishing yet for AAA and AA investors in Home Equity ABS. Bid lists have already begun to circulate as more investors throw in the towel and try to avoid further downside. The combination of investor capitulation and illiquidity is not a good one, and could put further pressure on prices. Forced selling on downgrades remains a risk for AAAs. That said, ABX has likely run its course in terms of its effectiveness as a hedge for cash bonds or other long HEL ABS or ABS CDO risk positions. Hedging long risk positions with ABX is no longer efficient. At this week's distressed prices, investors now lock in massive losses and preserve little upside relative to either selling bonds, or any potential improvement in housing . We expect investors will begin to seek alternative hedging instruments, such as bank and financial credit default swaps, where spreads do not yet reflect the ‘Housing Armageddon' priced into ABX, and more directly account for losses on super-senior ABS CDO exposures. Again, investors must live with basis risk, but preserve some upside if the housing correction is not as severe as that priced into ABX. Monolines remain under severe pressure. Ambac and MBIA stock prices declined by 43% to 29% since last Friday, on concerns writedowns will threaten their capital base. We believe credit spreads on monolines can move wider as investors begin to hedge counterparty risk.”

Lending Standards Tightening at Large Banks
From Lehman: “The Senior Loan Officer survey showed significantly tighter lending standards for prime, non-traditional and sub-prime mortgages with large bank leading the way in tightening standards for prime mortgages (in contrast to small banks which showed a much more modest tightening) but with banks of all sizes tightening credit for non-prime mortgages. On the business lending side, C&I lending standards saw some tightening of standards with the number of banks tightening standards jumping from 5 to 10. However, the vast majority are still not tightening lending standards. Once again the breakdown shows large banks tightening standards more aggressively than small banks.
Lending to consumers outside of mortgages showed the majority of banks (90%) were still as willing to make consumer loans as they were three months ago with all but one bank leaving their standards for credit card applications unchanged. Despite this trend, large banks suggested that the tightening of lending standards was due to the economic outlook and secondary markets for selling these loans rather than changes to their capital position or liquidity concerns. In general, while the report shows substantial tightening of lending standards, the degree to tightening seems highly dependent on what is being financed. Additionally, outside of mortgages, there seems to be only modest constraint on consumer spending (particularly via credit cards) at this point in time.”
From Dow Jones: “Demand for consumer and business loans has also weakened, the Fed said in its quarterly survey of senior loan officers.”

MISC
From Dow Jones: “U.S. Federal Reserve Governor Randall Kroszner warned that the subprime mortgage market will likely continue to deteriorate and called on lenders to go beyond a case-by-case approach in helping troubled homeowners…He cited recent data showing a likely continued weakening in housing activity, as well as the fact that most variable-rate subprime mortgages have yet to reset. Meanwhile, it is getting harder to refinance loans before they reset due to a “significant” tightening of lending standards by banks on subprime loans, said Kroszner.”

From UBS: “Fitch Ratings announced today that they may lower the AAA credit ratings on one or more monoline bond insurers, an unprecedented move that we believe may wreak havoc in the municipal bond and CDO markets.”


End-of-Day Market Update

From SunTrust: “Treasuries traded in lackluster fashion Monday and seemed unwilling to respond to much of anything. FED Governor Mishkin got the day started with some slightly bearish comments. He opined that if the FED overshoots on lower rates, it needs to be willing to expeditiously remove the easing before inflation becomes a threat….the bond market is closing on the lows of the day.”

From UBS: “Treasuries meandered around for most of the day before falling to the day's lows at the close. Bills took a beating as the 6-month T-bill cheapened by nearly 14bps, and the 3-month yields rose almost 8bps…Mortgages saw more than $3B in selling from various types of accounts, while buyers have largely sat on the sidelines, leading MBS 9 ticks wider to Treasuries and 6+ wider to swaps.”