The talk of the town over the weekend was General Motors this, General Motors that....well this morning the news finally broke that GM, an American icon, was indeed filing for Chapter 11 bankruptcy after falling $172bn in debt ($82bn in assets). When all is said and done the US government will own 60% of GM, the Canadian government will have a 12.5% share, the UAW will take 17.5%, and unsecured bond holders will share 10% ownership. Existing GM shareholder value will likely be wiped out....meaning preferred and common stock holders get nothing.
Equity traders chose to ignore the fourth largest bankruptcy in US history (the largest industrial company bankruptcy ever) in favor of finding economic optimism in today's data releases....April Personal Income rose 0.5% versus an economist expectations for -0.2%. April Consumption fell 0.1% versus expectations for a month over month 0.2% decrease. April Construction Spending moved 0.8% higher versus the street's estimate of -1.5%. Lastly the May ISM Manufacturing Index reading registered 42.8....2.7 percentage points higher than the April 40.1 print, and better than the expectation for a read of 42.2.
These data sets (combined with Chinese Purchasing Managers index) helped momentum steadily snowball throughout the day (cash came off sidelines and went to work). The Dow closed +2.60%, the S&P ended the day +2.58%, and the NASDAQ was +2.59% when the closing bell range at 4pm.
The biggest sentiment indicator in the world, the Dow Jones Industrial Average, is on a three month buying spree....currently testing its highest levels of the year...
Unfortunately the market's general feeling that the "worst is behind us" has planted a spotlight on the intended and unintended consequences of the US government printing money to stabilize the economy (ugh...inflation). These fundamental focuses were the headline igniters behind last week's monumental fixed income selloff that occurred...and also the cause for today's recovery retracement. On the day the 10 yr Treasury moved 20bps higher while the yield curve's steepness, as measured by 2s vs. 10s, closed near 275bps.
As the yield curve steepened, mortgage market participants began having flash backs of last week's "duration shedding" event (Black Wednesday)...and the selling snowballed. After all was said and done there was about $6bn for the street to absorb...with the Fed reportedly buying up between $2bn-$3bn. The overall bearish bias also made liquidity an issue which added fuel to the sell off as market makers refused to get stuck long duration(EXTENSION RISK) without owning it at bargain prices. This lack of willing buyers pushed prices of "rate sheet influential" MBS coupons back into the discount...we lost all of the facemelting progress that we me made up on Friday...
(FYI advanced audience...lots of accounts paying fixed in swaps today...this was either servicers covering their expected loss of income or GM bondholders convexity paying/selling).
Lenders
repriced for the worse..then repriced for the worse again. By day's end
mortgage rates were back over 5.00%....and Friday was forgotten.
To lock or float?
Here is how I answered that question when asked earlier today...
My pipeline would be operating under a 95% hedge ratio for two reasons: Irrational market pariticipant behavior and illiquid market conditions in rates sell offs. If I was a borrower...all is dependent on economic news and market psychology. Even then...until the yield curve finds a new range..."selling into strength" has the potential to weaken short term bullish momentum. So if youre floating short term, take advantage of rates below 5.00% while you can. If you have some time to float....and believe the percieved economic recovery is nothing more than a stabilization/avoidance of the Great Depression...then float until the market corrects itself. Read More about the expected behavior of the fixed income market participants...
Do you think the market's economic optimism is warranted? Is the market mistaking stabilization for recovery?
We say the recovery will not be in full effect until housing numbers consistenly indicate progress (not occurring)....
Its gonna be awfully hard for housing to manage a recovery with mortgage rates over 5.00%...
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