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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: UncleBigs who wrote (46498)	12/3/2005 10:28:53 AM
From: russwinter	Read Replies (2) of 110194

By way of example of how price fixing works, take a look at the agency market. Here are the spreads (last number)at the end of June: FNMA 3.875 05/15/07 3.796 (16.1) FHLMC 4.125 07/12/10 4.055 (30.8) FNMA 5 04/15/15 4.307 (34.1) Now I think even complacent Bulls who connect the dots have to ask how it is, that a loan for Joe Sixpack's house, would have a credit spread of only 30 bp over equivalent Treasuries? This is especially the case right at the point when every financial media outlet in the county starts the Bubble bursting drumbeat? What kind of market ignores clear and present danger? The answer: a rig one. In the 1H, 2005, FCBs bought 77.2 billion in agency securities or $12.86 billion a month. So fast forward to today. The evidence is mounting that Joe's collateral, and ability to service debt is strained. Any reactive thinking person would have to acknowledge that clear and present danger or risk to agency collateral has increased since mid-year? Anybody want to take the counter to that thesis? Yet despite that and although overall yields are up (90 bp on the short end, 65 on the long end), agency spreads have only widened 10 bps. Since mid year FCBs have slightly lowered their purchases to $10.28 billion a month. Therefore the spread can be largely explained by this FCB variable, slightly less intervention has translated into slightly higher spreads, so that's how pricing fixing works. There is no Adam Smith market (yet) because who wants to get in the way of central banks? What do FCBs do when Joe fails to make payments, and then turns over the keys on his negative equity house? Will the US government guarantee them. The Treasury has repeatedly said not. FHLMC 4.375 11/16/07 4.697 (27.5) FHLMC 4.125 10/18/10 4.841 (40.0) FHLMC 4.375 07/17/15 4.947 (43.5)

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