...all bonds are viewed with suspicion. Even Agencies, the step-sisters to Cinderella Treasuries, have been avoided due to billion dollar write-offs at Freddie and FNMA. Swaps—in third place on the quality ladder, yet still reflective of LIBOR yield levels offered by the world’s best banks—provide 70+ basis point premiums or more to Treasuries across almost the entire yield curve. Agency-guaranteed mortgages, reflecting higher levels of assumed volatility, present 150 to 175 basis point pick-ups. What appear then, to be strikingly low yield levels for U.S. Treasuries, are not being reflected by the rest of the U.S. high-quality bond market. Fed ease has lowered Treasury yields, but for the rest of the market—the segment that influences the bottom line of U.S. corporations, homeowners, and consumers—not much has changed.
The cheap money that fueled the housing bubble came not from banks, but from investors who bought debt backed by subprime and jumbo mortgages. The huge wave of ratings downgrades and the spike in delinquency rates has sent those investors running for the hills. And we'd bet they're not coming back just because the Fed's about to lower the funds rate. The fed-funds rate, which stood at 5.25% on June 28, is expected to be cut this week by a quarter-point, to 4.25%. Over that same time, the yield on conforming mortgages has come down to 5.59% from 6.29%, according to James Bianco, president of Bianco Research. That's because investors are willing to buy securitized, conforming mortgages that have the blessing of Fannie Mae and Freddie Mac.
Anything without the government's implicit support continues to be shunned. The yield on a jumbo loan remains at 6.5%, largely unchanged from where it stood in June. Home-equity loans cost 8.05%, up from 7.69% in June. Likewise, the yield on one-year adjustable-rate mortgages has risen to 5.63%, up from 5.5% on June 28.