Morning Report: New 30 year bond proposal 8/28/17

Vital Statistics:

Last Change
S&P Futures 2445.8 3.3
Eurostoxx Index 373.4 -0.7
Oil (WTI) 47.5 -0.4
US dollar index 85.6 -0.1
10 Year Govt Bond Yield 2.17%
Current Coupon Fannie Mae TBA 103.33
Current Coupon Ginnie Mae TBA 104.21
30 Year Fixed Rate Mortgage 3.84

Stocks are up this morning after Harvey pounded Houston. Bonds and MBS are up.

About 10% of US gasoline refining capacity is offline due to Harvey. We could see higher gasoline and heating oil prices as a result.

We have a big week of economic data with GDP, personal spending and incomes, PCE inflation, and the jobs report. The December Fed Funds Futures are pricing in a 61% chance of no change in the Fed Funds rate at the December meeting.

Janet Yellen and Mario Draghi defended the post-crisis regulatory framework and suggested only “modest” changes to it. Janet Yellen’s term expires early next year, and many are wondering who Trump will nominate to replace her (or whether she will be re-nominated). Gary Cohn is the name most mentioned as a replacement. With regards to Dodd-Frank, most of the regulatory changes will probably concern the regulatory burden for smaller community banks and finding a way to give them some relief. A change in the structure of the CFPB would also be a possibility.

Speaking of the CFPB, there is talk that Director Cordray will be resigning soon in order to run for Governor of Ohio.

The Fed lays out a proposal for a new type of 30 year fixed rate mortgage – the COFI (cost of funds index) mortgage. It is a 30 year fixed rate mortgage, however it has restrictions on refinancing and equity extraction. Essentially, it is an ARM from the banks’ standpoint, and a 30 year fixed from the borrower’s standpoint. The payment never changes, however the amount of the payment that goes to principal and interest varies with interest rates. When rates fall, the interest component of the fixed mortgage payment falls as well, and that extra payment is applied to the principal, which creates a reservoir of home equity. When rates rise, the interest component increases, and the home equity component falls. If the reservoir is empty (i.e. no home equity to draw upon), the bank covers it. Essentially the idea would be to replace something that is difficult to hedge (prepayment risk) with something easy to hedge (basically option-like interest rate risk). The added equity build will also limit risk to the government, which still guarantees the credit risk.  Interesting idea, however the industry will probably not like it, as it reduces refinancing opportunities. I suspect these bonds will also be difficult to securitize as well.

28 Responses

  1. I know it’s Mark-in-Austin and not Mark-in-Houston, but has anyone heard from him?


    • Sprung a leak by chimney flashing and have a pot on den floor by fireplace. Not life threatening. Also had the 8 hour power outage.

      Austin is not sitting on the water table likke Houston. Flooding comes from the flash floods of suddenly swollen creeks that drain into the Colorado River from the Hill Country – several through Austin – one literally in my back yard. However, across the creek from me on a 2′ lower bank, is a neighborhood greenbelt meant to serve as a floodplain, which works.

      George, are you taking in refugees?


  2. Apparently letting the AntiFa do whatever they want is police policy now.

    “On Sunday, police in Berkeley maintained a strict perimeter around the area in the beginning of the afternoon, including enforcing an emergency city rule outlawing sticks and other potential weapons from the park. Fifty officers were spread out at the area’s four entrances, according to the Daily Californian.

    But antifa protesters — armed with sticks and shields and clad in shin pads and gloves — largely routed the security checks and by 1:30 p.m. police reportedly left the security line at the Center Street and Milvaia Street entrance to the park. Berkeley Police Chief Andrew Greenwood told the AP the decision was strategic — a confrontation was sure to spark more violence between the protesters and police.

    “No need for a confrontation over a grass patch,” Greenwood said.”

    No need to actually enforce the law.


  3. Glad to hear Mark and McWing are both surviving for the most part.

    Just wanted to let you all know that the renewal went through for the domain name here for another year. Nice to see you’re all still here enjoying the conversation!

    Liked by 1 person

  4. It’s amazing, 95% + of the thousands of water rescues in and around Houston have been done by civilians and their personal boats.

    Liked by 1 person

  5. Interesting article on the whole Russia meddling in the election issue.


  6. Vox gives a prediction:

    “Hurricane Harvey is a humanitarian disaster. It will also send gas prices soaring.
    The Gulf Coast is a crucial energy hub. That’s bad news for consumers nationwide.
    Updated by Zeeshan Aleem
    Aug 29, 2017, 8:50am EDT

    DeHaan estimates that in the next two weeks, gasoline prices could increase between 20 and 35 cents percent per gallon in the Gulf Coast region, between 10 and 25 cents per gallon in the Midwest, and between 5 and 15 cents per gallon on the East and West Coasts.”

    Hopefully Trump has enough sense to suspend all EPA mandated special blends of gas if there are shortages.


    • Serious question – how would suspension of blending corn based ethanol help ameliorate the expected shortages? The shortages will be from refinery shutdowns on the Gulf. Almost half of American refineries will remain open. What does blend have to do with it? If your car can run on E85 there should be plenty of that shipped from the Great Lakes.


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