Tuesday, January 6, 2009

Back in the Saddle: Trends for 2009

The above chart is simply shocking to me. Uninsured mortgage related assets are still very dangerous to hold. There are /will be diamonds in the rough, but serious legwork will be needed. Mortgage loans originated from 2003 - 2007 are experiencing unprecedented defaults. It will only turn around when......

...this graph bottoms. It isn't an amazing insight, but banks will not turn on the money spigot until they believe the collateral on their loans is stable.

The above graph restates the case. Primary dealers typically hedge their interest rate risk by selling Treasury notes and bonds short, while holding risky assets. Their holdings of Treasuries is approaching FLAT and there has been a steady decline in corporate debt holdings. The Fed's participation in the MBS market has propped up primary dealers' holdings.

Money supply is still expanding, even though financial institutions are verrryyy conservative (see post on reserve balances from a week or 2 ago). This does not make for a good match for those who are long 3%, 30 year bonds or not as short as they should be.

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