Asides

Fed Needs to Buy Agency Mortgage Bonds

By The Prince ⋅ March 10, 2008 ⋅  Email This Post ⋅  Print This Post ⋅ Post a comment

10 Feb 2008 - In the latest sign of how broken the credit markets are, PIMCO’s Scott Simon is calling for the Federal Reserve to go into the market and purchase agency backed mortgage bonds.  To get a sense of how bad things are in the Agencys market take a look at this earlier Bloomberg article where William O’Donnell, a UBS AG government bond strategist, writes that the markets have become "utterly unhinged".  He goes further to say that a lack of liquidity has "led to stunning air-pockets in price levels".  Yields on Agencys (government sponsored AAA MBS issued by Freddie Mac and Fannie Mae) rose to a new 22-year high relative to U.S. Treasuries.  Banks have stepped up margin calls and concerns are growing that the Federal Reserve may be unable to curb the credit slump.  These margin calls had something to do with the problems over at Carlyle Capital.  High leverage and a severe dislocation in the credit markets, have severely crippled Carlyle Capital.  Banks have tightened their lending standards and are now requiring more collateral for loans.  In Carlyle Capital’s case, the value of its collateral, Agencys, have dropped to levels not seen in more than 22 years.  It looks like Carlyle Capital will become just the latest entity to meltdown with the credit markets.  Or maybe this was just bound to happen, since after all you can only run 32x leveraged for so long before something is going to trip you up (Carlyle Capital had $670 million in investor funds borrowed to create a portfolio of bonds valued at $21.7 billion).  According to Simon, head of mortgage-backed bonds at PIMCO "relatively little" agency mortgage-backed securities are being traded.  O’Donnell seconded that saying, "Traders are putting their phones down and backing slowly away from their desks".  The Prince only sees this as the latest sign of the credit apocalypse.