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March 6, 2008
Credit Markets "Utterly Unhinged"
Most unnerving article I have read in some time on the current turmoil in credit markets.
The difference in yields, or spread, on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened about 21 basis points, to 237 basis points, the highest since 1986 and 103 basis points higher than on Jan. 15. The spread helps determine the interest rate homeowners pay on new prime mortgages of $417,000 or less.
The markets have become "utterly unhinged,'' William O'Donnell, a UBS AG government bond strategist in Stamford, Connecticut, wrote in a note to clients today. A lack of liquidity has "led to stunning air-pockets in price levels.''
Investors are realizing that banks have little room to make new investments amid rising losses and a flood of unwanted assets, said Scott Simon, head of mortgage-backed bonds at Pacific Investment Management Co. The world's top banks have reported more than $181 billion in asset writedowns and losses, been stuck with $160 billion of leveraged buyout loans, and bailed out $159 billion of structured investment vehicles.
"Everything is telling you the financial system is broken,'' Simon, whose Newport Beach, California-based unit of Allianz SE manages the world's largest bond fund, said in a telephone interview today. "Everybody's in de-levering mode.'' [Emphasis mine]
And when everyone is in de-levering mode, only two things can happen: Either markets stop working, or prices drop like rocks -- or both, of course.
[via Bloomberg]
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Paul, do you still think the blogosphere has been too negative?
On the balance of probabilities, we are about to go through another "dot bomb" ... but this time it will really hurt as the bomb is people's actual homes.
As I posted to Roger's blog yesterday, it is time to start seriously considering strategies to both defend against and take advantage of the event.
Cash? Shorts? Puts? Gold? Would love to hear your thoughts.
Regards,
George
Paul,
I will echo George's comment. You and a lot of other people are only beginning to grasp the depths of the problems in the capital markets. In particular the banks are tapped out. Think about what the amazing growth of the TAF means - and yet the TED spread is going up again. The bears had and have it right.
The problem with equity markets is that margined funds i.e. Hedge funds are getting margin calls and having to sell their only liquid positions and that means stocks.
Too many Hedge funds chasing returns with 3x-4x margin positions.
When they get done selling their stock positions the market will shot up. The problem is many, many funds will be out of business due to way too much leverage within their portfolios.
Commodities markets are also way over leveraged and will soon be the next disaster.