A Tale Of Two Flashpoints

Tuesday, April 27, 2010

Congratulations to those who voted for option 3 in Friday's poll. This choice (Greece receives bailout, other EMU member(s) receive bailout, euro remains intact), which won the plurality of votes, is now looking ever more likely. Sentiment towards Portugal, for example, has deteriorated very sharply indeed- 2y yields have more than doubled so far this month. That the Belgian government has collapsed isn't exactly a ringing endorsement of European stability, either.

The contrast between peripheral Europe and another supposed locus of distress, the US mortgage market, could not be greater. Remember when the big fear was that the end of QE would cause the mortgage market to tank? Seems like a lot longer than 4 weeks ago, doesn't it? While it's true that the spread between 30y mortgage rates and 30y Treasuries has widened a smidge, it's still way, way below the prevailing levels during most of the Fed's QE program.
Moreover, 5 year ARM rates are just about the best they've ever been. A quick glance suggested that in the UK, for example, the equivalent product (marketed as a '5 year fixed rate', rather than as a floater, as in the US) is offered at interest rates roughly 100 bps higher.
Despite this of course, the US housing market remains tepid at best. Were mortgage rates ever to "normalize", the housing market would be in very deep doo-doo indeed. And so Macro Man will be watching tomorrow's FOMC statement with great interest. The current language is probably nearing its sell-by date, if for no other reason than greater flexibility is desirable. Yet anything that rocks the boat too hard could possibly send mortgage rates careening back up....and at this point, that's the last thing that the the FOMC or the US economy want right now.

Posted by Macro Man at 8:12 AM  

9 comments:

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forex-cat said...
9:33 AM  

>that's the last thing that the the FOMC or the US economy want right now.


Don't you know,never bet against the FED, they always get their man.

FX said...
11:15 AM  

Just read most of the piece from Buiter on sovereign defaults. Are there any signs that EU governments buy up greece government debt at deflated values now before they show us the final bailout plan. That way they would decrease the risk to their own banks, and make conditionality more convincing.

post said...
1:57 PM  

Professionals More Nervous Than Usual…Downside Risk Today

The tone in the professional community this morning is a lot more nervous than in past days, visibility with respect to contagion is very clear. The visibility can be seen through the acceleration in Portugal 2-year spreads, 3-month USD LIBOR, a break of the 200-DMAVG in TED Spreads, US Bank CDS widening for 8th day in a row, National Bank of Greece -7%, and Spanish zombie banks seeing their worse day since fears in Jan/Feb. Add in the facts that Treasuries are bid ahead of 3-days of sizeable auctions, Crude Oil is weak and China (-2%) made new lows on the year. Finally, Technology has to deal with SMIC (best MSCI Asian name YTD) disappointing and TSM’s negative comments on full year business expectations.

The unanswered question - does the US investor really care enough about contagion or overnight price action to truly sell long vs. hedge out long risk? Without true long liquidation it is hard see a real rout. If weakness materializes today due to the above, the exercise is more about hedging first and losing control of your book.

Right Field said...
2:26 PM  

And that's just the 'visible' tip of the iceberg. A ton more 'soft' anecdotal stuff that you can't see / measure as easily also points that way.

I'm pretty sure that even the man on the Clapham Omnibus is talking ahout it these days. A bit like when the Evening Standard finally figured out cable was printing at 2.0000 and above, and their gig reviewer started referring to badboy rapper fifty (sorry, 'fiddy') cent as 25p. Oh how we chuckled. After we'd got done sellling the bejeezus out of it of course.

Pascoe said...
2:44 PM  

Greek 2-year at 17%. Haircuts all round for recent punters of GGBs...

Leftback said...
5:12 PM  

@ Leftback Yup thats double 2 yr South Africa. In......sane.....

Pascoe said...
5:21 PM  

somehow, it was weirdly funny that as GS execs faced the politicians, "market jitters" came to their rescue; kinda horsetail hair at the doorstep of the intimidation target? what will they do for the market equivalent of the horse head in the bed stunt?

Will GS ever have to thank greece and portugal?

Question is when will the focus turn to Ireland, Italy and some of the dodgier eastern europeans?

judyjl said...
3:00 AM  

What I find particularly funny about this whole liquid macro game is that you can have the playbook mapped out a year in advance relatively easily (free money --> rally in risk --> QE comes to an end --> budgets come out, people start worrying) and all you have to do is just hit the pitch in front of you and not think too hard. You actually get paid well for not over-thinking things.

Nemo Incognito said...
5:03 AM  

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