10 yr testing the support

[SD Realtor]

mgu you are correct, as long term rates indeed are not indexed to the ffr. They follow the long bonds.

SD Realtor

[Bugs]

Before when the Fed was raising the rate the lenders had an alternative – they could sell directly to the MBS market. Now that the MBS market is in a coma the lenders are tied to the Fed again. So I think that the conventional financing terms will start to more directly reflect the moves made by the Fed.

[lendingbubblecontinues]

mortgage rates are tied primarily to risk premium….would you loan me a lot of money at a very low rate if you were concerned that the collateral was losing value and might not cover my debt if I couldn’t pay it off?

as asset prices fall, the rates to borrow money to buy those assets invariably go up

[HereWeGo]

bsr-
As I understand, the 91-day is generally used as collateral when banks borrow at the “repo” rate from each other, which is just a bit lower than the FFR, as the FFR is an unsecured loan. So the yield should be about the same as the FFR. In practice, that’s not the case, but it’s usually 30-50 bps off at most.

Here’s a relevant chart:
http://www.cxoadvisory.com/blog/internal/blog3-15-07/FFR-Tbill.gif

[LA_Renter]

I guess the 3 mo is showing a flight to safety to say the least. I know people are using this to justify a rate cut but I don’t think a Fed Funds rate cut will solve the current crisis. I saw Kudlow today, probably the most vocal proponent of a rate cut, and somebody pinned him down on this, he basically agreed that a rate cut won’t fix this current crisis but would be a confidence builder for the market. So its only value is symbolic in nature much as the 50 bps cut in the discount rate. I’m beginning to think Ben won’t cut at all but will try something else. The crumbs coming out of the FED right now indicate Ben is very cognizant of moral hazard and is eager to break away from the fabled Greenspan Put. But in a market like this Sept 18 might as well be a year away, there is a whole lot that can happen and most of it is probably bad.

[bsrsharma]

Thanks, But I am still puzzled. If 91-day is used as a collateral, FFR is a secured loan, right? The Treasury rate is set by market while FFR is a fiat rate. Why should they match? I can think of one reason – some sort of interest rate arbitrage. Borrowing at FFR to buy higher yielding treasuries. But if FFR is higher than treasury, what do you do? This is not a hypothetical question. What is happening in the treasuries now is foreign central banks are liquidating their holdings to lower their $ exposure. They are attracted by higher price of treasuries driven by all the investments that are avoiding private debt paper (CDO/CMO etc.,). So, in a round about way, investors are replacing foreign central banks as treasury holders. This is causing a drought in private sector debt. Goodbye cheap mortgages/credit card/auto loans etc.,

[LA_Renter]

“This is causing a drought in private sector debt.”

That is the genesis of the recession IMHO.

[HereWeGo]

Actually the FFR is for an unsecured loan. The “repo rate”, which is slightly lower, is secured, and that is usually secured by the 91-day, as I understand it.

It certainly doesn’t seem that anyone is liquidating US Treasuries at this point. That’s a big part of the commericial paper problem … too much flight into “cash”, as represented by the safest debt instrument of all, the 91-day US T-Bill.

[bsrsharma]

See http://www.rgemonitor.com/blog/setser/212133 for a report on foreign central bank sales. They are profiting from the flight to quality and using it as a selling opportunity.

[mgubnyc1]

I Agree with Lendingbubble, who in their right mind is going to invest is Jumbo Mortgages, anyone wanting to refinance a jumbo laon is going to HAVE TO pay a preimum, not sure about conforming loans! but I think more people have Jumbo loans they need to refinance.

what was that word greenspan used when the bond rates were all fucked up 2 years ago? culundrum? maybe were going to have another culundrum!!

[Author]

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