Recap 7-09-13


One sign that mortgage credit remains overly constrained:

75% LTV with a 5y floating rate of 5-7% seems very expensive when compared to 5.7% for 5y fixed rate, unsecured HY debt. Heck a 5/1 ARM mortgage is 3.7%!

Separately, with short dated US treasury yields having mostly retraced Friday’s move, they look broadly ‘fair’ with respect to FOMC projections. The date of the first hike priced in by the market remains earlier than FOMC median projections, but is likely due to the fact that we are at the zero bound, along with some additional uncertainty around Fed policy. Thus, it will be interesting to get some additional color on FOMC thinking tomorrow. Bernanke’s speech later tomorrow will be closely watched as the market tries to gauge whether the Fed chairman is comfortable with the recent move in yields. There is probably more uncertainty now around ‘fair value’ for 10y yields than in some time due to not only uncertainty around future Fed policy but also the exact impact of QE programs to date. IMHO, they are near fair levels at the moment based on macroeconomic factors, but are likely to rise inline with forward rates.


  • ECB member Asmussen: (voted against a rate cut)
  1. does not rule out new LTRO
  2. Expects the ECB to take over bank supervision in Sep/Oct 2014
  3. Must prepare for bank capital shortfalls

S&P cut Italy ratings from BBB+ to BBB. This was a surprise as the market expected the downgrade to occur after the Italian election

China CPI rose 2.7% YoY in June vs 2.5% exp and 2.1% prev

Australia NAB Business Confidence improved to 0 from -1 prev

Japan M2 Grew 3.8% YoY vs 3.4% exp and prev

Canada Housing Starts was stable at 200k vs 188k exp

Upcoming Data:

  • Wed: FOMC minutes, Bernanke speaks, Australia Employment
  • Thu: BoJ, US Jobless Claims
  • Fri: UMichigan Confidence, JPM and WFC reports
  • Mon: China GDP, IP, Retail Sales, US Empire Mfg, Retail Sales
  • Tue: UK CPI, German Zew, US CPI, NAHB Housing Market index