Well today was another day of huge swings for both the stock market and Mortgage Bonds. Mortgage Bonds tried to rally early in the session by moving 82bp higher from a lower open, but then swung 119bp the other way to resume its downward trend with a loss of 81bp. The bond market fought lower bond trading volumes and news of a global coordinated effort by the world’s major economic powers to guaranty inter-bank loans and allow governments to purchase stock in troubled banking firms.
This put investor concerns over the credit crunch more at ease while many Fed analysts feel the Fed will cut short-term interest rates by 25bp to 50bp at their next FOMC meeting at the end of October. This sentiment also pressured bonds lower as did news of S&P ratings downgrades on debt issuers. S&P downgraded 227 issuers affecting $1.8 trillion of rated debt in U.S. dollars and $1.3 trillion rated in Euros.
The day’s big news came from the Bush Administration including Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke, and FDIC Chairman Sheila Bair when they announced a plan to use $250 billion of the $700 billion appropriated in the financial rescue bailout bill recently passed by Congress. The government will begin by buying stock in nine of the largest banks including Bank of America, JPMorgan Chase, and Citigroup.
This is a very good idea and is an impressive effort by the government to stabilize the financial markets. As we have talked about, the over leveraged banking system is mostly due to accounting regulations. As losses are taken, it reduces (on paper) the net worth of institutions, which then see their ratio of loans to capital skyrocket. The only ways to de-leverage are 1) to sell off the loans – and in this market, that means at “fire sale” prices, which add to losses, exacerbate the problem, and that is why, in part, we are where we are. 2) To raise capital. But it is hard to do this in this market. So the Feds plan today says they will buy non-voting or preferred shares. This is a way to help banks raise capital. So far this has led to a favorable reaction among banks as evidenced by the drop in the LIBOR Rates.
After several days of losses, Mortgage Bonds are technically oversold and ripe for a bounce higher. With prices now crashing well below the 200-day Moving Average, the bond does have a lot of technical damage to repair in order for prices to improve much further. Hopefully you have locked in your interest rate if you are closing soon. On new transactions, or if you have time to wait, carefully float and see if Bonds can build back up. There are some great Colorado Springs properties for sale. It is still a great time to find a real estate bargain.
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