The Week Ahead in the Capital Markets

February 19, 2008

Thirty-year mortgage rates, which fell nearly 1.00% early this year and triggered a refinance boom-let, have risen by nearly as much in recent weeks. The bond market’s focus has shifted dramatically to inflation. Bond traders fear that inflation will result from the fiscal and monetary efforts being directed at the economy, and long-term rates are headed up. Odds for more rate cuts have done nothing but increase, and futures predict sub-2.00% fed funds later this year. The difference between the two-year and ten-year Treasury yields is closing in on 2.00%, making the yield curve the steepest it has been since the middle of 2004. The words of Charles Prince (Citi’s former CEO) bear repeating: “I’d be a lot smarter if the yield curve were steeper.” Bankers are starting to feel smarter, borrowing cheap and lending dear.”

AN INSIDER’S VIEW FROM THE CAPITAL MARKETS COOPERATIVE TRADING DESK:

“The mortgage market set a record last week. Mortgage rates are nearly 3.00% higher than equivalent Treasury yields. This spread hasn’t been as wide at any time in the past ten years. Bernanke’s comments to Congress, in which he signaled more rate cuts to come, tacked on another 0.20% to the already wide spread. When Greenspan worried about deflation earlier this decade, and huge rate cuts were on the horizon, the spread jumped to almost today’s level. But it collapsed in short order. Historically speaking, it is difficult to imagine spreads staying this wide for very long.

Traders are scrambling to understand the higher loan limits in the stimulus package. SIFMA, the organization that oversees mortgage-backed securities, ruled last week that loans above the $417,000 limit are not eligible for TBA pools. Translation: jumbo loans will not trade at the same prices as conforming loans, and pricing for jumbo loans is still anybody’s guess. Meanwhile, jumbo fixed loans last week improved to slightly better than three points behind their conforming brethren.” (CMC traders price, hedge, and sell $billions of mortgages for their clients, and offer a front-line perspective on the markets.)

“What big bank is most likely to find the safest, fastest route through the U.S.’ dangerous credit mess?” asks Barron’s. Wells Fargo, of course. Barron’s points out that the U.S.’ only triple-A-rated bank “doesn’t have a big capital-markets operation exposed to credit derivatives, structured-investment vehicles, or mortgage-backed securities. It isn’t slowed by a huge book of sub-prime residential-mortgage loans, and its balance sheet can withstand more bullets than most.” Its biggest shareholder is Warren Buffett’s Berkshire Hathaway, and Berkshire just raised its Wells position to 9.4%. Kudos to Wells.

As you know, Barack Obama has won the last eight primaries. I haven’t seen Hillary this worried since they opened a Hooters in Chappaqua. – Jay Leno

Thanks for your business and have a good week. – Tom Millon

About Capital Markets Cooperative
Capital Markets Cooperative (CMC) provides mortgage bankers with the economies of scale and the expertise to reduce risk and maximize profit in the secondary market. Regarded as the premiere secondary marketing specialist in the industry, CMC has worked with financial institutions nationwide to break traditional barriers in capital markets and take performance and profits to the next level. To date, CMC executives have managed more than $500 billion of mortgage volume. CMC board members are Tom Millon, Jeff Harry, and Harold Koegler.

For more information about Capital Markets Cooperative, visit www.capmkts.org or call 904.543.0052 or e-mail info@capmkts.org. This e-mail is not a solicitation or investment advice of any kind. You may change your e-mail address, or if this e-mail has reached you in error, or you do not wish to continue receiving it, please let us know by replying to tmillon@capmkts.org.