Wednesday, January 29, 2014

Floating Note Rate Auction Primer



 

Darn it - I forgot to send the leprechaun a card! Lucky Charms turned 50 years old - but with Atlanta shut down due to snow, there will be plenty of time for a leisurely breakfast. Time is fast - how is it that we're almost done with January? And just to think, anyone turning 50 this year was not alive when Kennedy was assassinated, 40 years ago the Eagles "Already Gone" was at the top of the charts, and 30 years ago Ronald Reagan was running for his 2nd term. Time flies...Certainly the job market is flying around, with various firms hiring and others cutting back.

 

Michael Simmons, SVP with Axis AMC writes, regarding the Newday article, "Fascinating mess of an article - stuck in a time warp and inaccurate on a number of levels. First, HVCC was never 'retracted' - it expired statutorily in, if memory serves, November of 2010 and was replaced, essentially intact, by AIR (Appraiser Independence Requirements). An even bigger distortion was the false assertion that HVCC mandated that appraisers work for AMCs. What it did require was there is a buffer between the appraiser and anyone in loan origination ordering an appraisal. The intent was to remove the potential threat of direct coercion upon appraisers. That did have a substantial effect on diminishing individual intimidation of appraisers by loan officers - but, in the view of some, replaced that personal intimidation with institutional pressure. In truth, the explosive growth in AMCs was the result of many lenders seeking ways to reduce their own costs and liabilities by outsourcing. What's most disheartening in the article is the insinuation that all AMCs are evil and fail to use local appraisers or pay reasonable and customary fees. Under the regulatory environment today, lenders can ill afford to use an AMC that underpays appraisers or employs a bidding process for assignments or brings out-of-area appraisers in to do reports. While at times uncomfortable and inconvenient, and perhaps destined for some change, regulation that mandates best practices and compels compliant behavior will and should endure."

 

Turning to the actual markets, rates are not doing much, which is fine for those in capital markets. The big news might be the Treasury holding its first Floating Rate Note (FRN) auction today of $15 billion. It raises many issues: why would any secondary guy look at floaters? Should anyone be hedging with USTs and short rising interest rates? What about the ARM market? EPDs risk? It's tough to say, considering there's no consumer credit built into treasuries.

 

What happened last week?

 

MBS OVERVIEW

There are no major economic releases today and no major Treasury auctions. Today is all about the FOMC interest rate decision and policy statement.

 

ACROSS THE POND

After India announced a rate hike the prior day, Turkey announced an even bigger rate hike last night designed to stem the outflow of capital out of their country and to prop up their currency. Initially this worked in early trading but now the market has shrugged it off and their currency is selling off again. This is providing a lift for MBS pricing this morning.

 

THE FED - WILL THEY OR WONT THEY? 

They started their meetings yesterday and will release their policy statement today at 2:00EST.  The bond market is rallying in early trading as they are SPECULATING that what is going on with Turkey and other emerging market countries will cause the Fed to pause here.

 

In my opinion, this will not impact their policy - they will announce another reduction in the pace of their monthly purchases of Treasuries and MBS. The only question is the amount of the taper. The economic data that we have received (including the miss in the NFP) is not enough to alter their own economic projections and their decision to taper further is more based on their outlook and not on the past. Also, as we have discussed several times. The bond market has actually improved since their December meeting which clearly gives them permission to taper again since their concern is rising rates...and rates didn't rise...they improved.

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