Low yield and high risk equal bust
The loans in this group did not go to solid credits. Although market interest rates were low when these mortgages were written, the mortgages had rates averaging 11.2 percent. Yet investors who put up most of the money were willing to accept a floating rate of just 30 basis points - three-tenths of one percentage point - over the London interbank offered rate. At the moment, that gives them a yield of 3.2 percent.
If Moody's is right, those investors will eventually suffer capital losses. That is quite a combo for a security: low yield and high risk.
This is absolutely amazing to me and brings new meaning to the Death of Real Yields I speak of so often.
Leaders of the U.S. Senate Banking Committee said on Thursday they have agreed to the underpinnings of a housing rescue plan that will create a federal backstop for failing loans.
ReplyDeletehttp://www.reuters.com/article/bondsNews/idUSN1548132420080516
Good as treasuries if this passes I guess.
Kevin
Kevin,
ReplyDeleteThe Congressional Budget Office in a report estimated the fund would cost $1.7 billion and finance up to 500,000 loans worth $85 billion.
Why do I suddenly feel like a horse gambler again?
$1.7 billion goes into $85 billion exactly 50 times. Put another way, that's 50 to 1. Put me down for $10 in the eight race. I'm either feelin' lucky or she's goin' to the glue factory.
Leverage is such a wonderful thing. I'm amazed at what $1.7 billion will buy these days.
http://www.reuters.com/article/domesticNews/idUSN1232854020080513
Meanwhile, The Recovery Rebates and Economic Stimulus for the American People Act of 2008 provides $152 billion.
I'm surprised we couldn't get 50-1 leverage on that too. Just think how great we'd be doing. Instead of $600 each, we could be getting $30,000 each. That would be $7.6 trillion in tax relief if they could have found a way. Then again, who wants to owe $7.6 trillion dollars to the government? Excluding the debt we already owe (our current national debt), that's just crazy talk.
Stag,
ReplyDeleteFrom the article in your post:
Unfortunately for them, the fact the lender stopped trying to collect does not wipe the lien off the books, and it would resurface if the homeowner ever sought to sell the home.
The housing ATM is low on cash. Peak debt for many.
MAB,
ReplyDeleteWhere's Robin Hood when you need him?
Pa. man allegedly sells others gas on company's credit card
http://www.philly.com/philly/wires/ap/news/state/pennsylvania/20080516_ap_pamanallegedlysellsothersgasoncompanyscreditcard.html
Police say Michael Myers filled the tanks of dozens of vehicles until an accountant noticed the suspicious charges and notified police about the "Robin Hood" gas scam.
Nevermind.
Stag,
ReplyDeletehttp://www.bloomberg.com/apps/cbuilder?ticker1=MIIF1YR:IND
1 year inflation expectations are inflating. Apparently, Bernanke is winning a battle in the war on deflation.
Speaking of low yields, hah! I'm offering you 40 basis points over TIPS. You see, I got this guy who's near a breakthrough on turning petroleum products directly into corn! Or maybe it was rice,...who cares,.... The point is we're going to be rich! All I need is your money,...
ReplyDeleteMAB,
ReplyDeleteWinning the war on deflation since 2004! Recently beginning to win the war on high growth too!
That's okay though. It can't be a depression because the sun was out for the past two days in Seattle. Heck, it even hit 94 degrees at my house.
David,
Or maybe it was rice,...who cares,.... The point is we're going to be rich! All I need is your money,...
No time to invest in rice bowls! We're turning this country into a monster dust bowl. This ain't no mama's boy Sunday picnic. Come on down. Everyone and everything! Children and financial assets welcome.
TIPS Show Bonds See Bubble Burst for Commodity-Driven Inflation
ReplyDeletehttp://www.bloomberg.com/apps/news?pid=20601087&sid=aZmBfYN31tAU
Anonymous,
ReplyDeleteThanks for the link! I saw that headline scroll on Bloomberg TV last night and thought it was quite amusing. I had no idea (sarcasm) a simple number (the spread between TIPS and regular Treasuries) was an accurate bubble detector. It is my contention that it hasn't even been all that accurate at predicting the very thing it is intended to predict: inflation.
From the link...
``TIPS breakevens have continuously underestimated inflation.''
That's certainly helped me vs. owning non-inflation protected Treasuries.
That being said, I do wonder about a commodity bubble. If there is one, then I'll be a heck of a lot better off in TIPS than I would be in the commodities themselves. Throwing away all inflation insurance seems like a bad plan to me though. I have no doubts that any potential long-term deflation will be countered by more of the same (helicopter dropping and bailouts).
Japan gets US nod to end rice hoarding
http://www.theaustralian.news.com.au/story/0,25197,23718468-2703,00.html
The collapse came as think tanks and food experts called on Japan and the US to urgently unwind one of the biggest "invisible" distortions in global rice markets: a quirk of World Trade Organisation rules that obliges Tokyo to buy rice it does not need, and that eventually rots in storage.
We live in a world of "invisible" distortions. Nothing is easy when illusions cocmpete with reality. This article reminds me why I only hoard what I know I can personally use. There are no sure things (hoarding included).
And lastly, as an owner of long-term TIPS, I'm actually hoping inflation is tame. A CPI of 0% would be ideal (it would reduce my taxes). I just doubt very much I'll be that fortunate.
Anonymous,
ReplyDeleteI have one more thought on that link you supplied.
While consumers grapple with gasoline above $3.70 a gallon, record rice prices and the escalating cost of wheat, TIPS say the commodities market is a bubble about to burst. A commodity slump would worsen losses in the $500 billion TIPS market, where investors lost 2.35 percent in April, the most since December 2006.
This seems very illogical to me. Let me summarize it.
1. TIPS are predicting a commodity bubble about to burst.
2. A commodity bubble bursting would hurt TIPS.
3. TIPS are therefore predicting TIPS losses.
How can TIPS predict their own losses though? That's circular reasoning!
Here's a thought experiment using hopefully better logic and some extrapolation (you decide).
For TIPS to fully predict a commodity bubble about to burst, TIPS would have to fully price the burst in (meaning TIPS did not believe one bit in the bubble). If TIPS fully price it in though, then there can be no losses once the bubble burst (TIPS saw it coming).
One more thought.
ReplyDeleteI'm not suggesting that TIPS are fully pricing in a commodity bubble by the way. I'm merely heckling the idea that TIPS can predict their own losses.
In other words, the potential losses in TIPS would not come from the part that TIPS accurately predicted, but from what was not predicted (i.e., the bubble was bigger than TIPS thought).
There I go anthropomorphizing TIPS. I suppose that's okay because the link seemed to think TIPS could talk too ("TIPS say"). ;)