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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (40503)	11/2/2005 9:56:31 PM
From: russwinter	Read Replies (2) \| Respond to of 116555

Very good summation. I am thinking that prepayments are fading fast, even at current mortgage rates, there is no more rate incentive, most of the pool is at lower rates already. Few "premiums" left. And there is no more appreciation to extract anyway. idorfman.com So duration is going widen significantly, and stay widened. Right now I think it been around 2 1/2 years, or was because of serial refiing. There must be a source online that quotes this? Anyway, once duration spikes out, a couple of the players who like short durations may back away all together from the mortgage market: FCBs and banks. So that may leave an additional hole in the market. Then we have a bunch of leveraged hedge fund types that get quickly unwound. That's when we get a credit spread widening as well, and poor bids for the same mortgages that were short (2.5 years) that might now be 5 years and rising. I suspect it could be pretty dramatic, and don't even have to say what the impact on housing and the economy will be.

To: mishedlo who wrote (40503)	11/2/2005 11:44:19 PM
From: LLCF	Read Replies (1) \| Respond to of 116555

Nice analysis... essentially they're 'short a straddle' in options speak, and if they can "buy high and sell low" (ie. quiet markets) to lose less than their premium decay, they do well... if not........ OOOOOPS! It should be noted bull markets typically provide a good environment via liquidity and "continuous markets" for them to do their 'dynamic hedging' optimally. This has pretty much without exception been the case during the entire interest rate decline over the past 25 years, with a few well publicized hicups. My understanding is that both of these factors are typically noticeably absent in bear markets... to say nothing of some of hellish scenario's where other markets move in tandem (foreign withdrawl via dollar or other problems}. I can't imagine there won't be a massive train wreck at some point. Someone is short curvature in the mortgage market to the tune of every fixed rate loan receives a free put option. DAK