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Strategies & Market Trends : January Effect 2003 -- Ignore unavailable to you. Want to Upgrade?

To: Londo who wrote (542)	6/10/2003 2:19:00 PM
From: RockyBalboa	Read Replies (2) \| Respond to of 666

I don't think there's much going on in FRE. After all its an agency, and too big too fail, so to speak. That doesn't imply that the FRE equity (ie its book value) could be preserved in a downturn - actually this is the "first loss" but the better rated tranches of the bonds shall keep their value save for a few ramifications in the meantime. The first shunts which would explode are the mortgage funds who have been ready buyers of FREs residuals and the lower tiers. Then we will see. If enought credit enhancements or the providers of such have been wasted away (those providing support for the better tiers) then somebody has to step in and buy up the residual tranches for new deals otherwise the system could grind to a halt (leading to a credit crunch). This is something which nobody wants because it could interrupt the real estate business. But a severe loss of confidence could lead to such fallouts.

To: Londo who wrote (542)	6/11/2003 5:18:14 AM
From: RockyBalboa	Read Replies (1) \| Respond to of 666

I did a little modelling with a typical mortgage portfolio using todays CPRs as well as the fact that the percentage of 10y deals rises (f. ex 20%). The obvious result is that even when keeping the CPR constant the book duration of the agencies shortens so they have to hedge. They can do it by selling IOs and buying POs like they always do or they can buy back 30y and sell 10year Treasuries. Through intermediaries, both deals lead to the same result: the curve still continues to flatten. At one point, though, I think the Treasury must begin to issue 30years or the curve inverts in the longer maturities.