Mortgage Bond Prices Collapse By Most Since 1994 'Bond Market Massacre'

Tyler Durden's picture

"What just occurred [in the mortgage-backed-securities (MBS) market] is indicative of just how important QE is," as government backed US mortgage bonds suffer their largest quarterly decline in almost two decades. As Bloomberg reports, the $5 trillion market lost 2% in Q2, the most since the 'bond market massacre' in 1994 (when the Fed unexpectedly raised rates) as wholesale mortgage rates spiked by the most on record in the last two months. The reason these bonds have been hardest hit - simple - fear that the Fed's buying program is moving closer to an end. "The Fed, at times during this period, was the only outlet in terms of demand for securities," explains one head-trader, as the Fed’s current buying provided demand as other investors retreated and has grown as a percentage of forward sales by originators tied to new issuance, which is set to fall as higher rates reduce refinancing. With Fed heads talking back what Bernanke hinted at, there was a modest recovery in the last 2 days in MBS but the potential vicious cycle remains a fear especially now that “what was once deemed QE Infinity is no longer viewed that way."

Via Bloomberg,

Government-backed U.S. mortgage bonds are poised for their largest quarterly loss in almost two decades, with some of the debt extending declines today.




“What just occurred is indicative of just how important QE is,” Brad Scott, Bank of America’s New York-based head trader of pass-through agency mortgage securities, said today in a telephone interview.


The Fed’s current buying provided demand as other investors retreated and has grown as a percentage of forward sales by originators tied to new issuance, which is set to fall as higher rates reduce refinancing, according to Scott.


“The Fed, at times during this period, was the only outlet in terms of demand for securities,” he said.




The mortgage-bond losses rival the 2.3 percent declines in the first quarter of 1994 amid a slump in debt prices sparked by the Fed unexpectedly raising its target for short-term interest rates on Feb. 4 of that year, the first of seven increases totaling 3 percentage points. Fortune magazine at the time declared it a “bond market massacre.”


Home-loan debt without government backing has also been damaged. Subprime-mortgage securities have lost about 2 percent this quarter, including a 4.9 percent drop this month, according to Barclays Plc index data.




The plunge in mortgage-bond prices has sent borrowing costs soaring to the highest since July 2011. The average rate for a 30-year fixed mortgage rose this week to 4.46 percent from 3.93 percent, the biggest one-week increase since 1987, according to Freddie Mac surveys.




The underperformance is tied partly to the way in which the lifespan of mortgage securities extends as projected refinancing declines, as well as the potential slowing of the Fed’s buying in the market.


The rout has been exacerbated by sales by real-estate investment trusts and other firms that rely on borrowed money that are seeking to pare rising leverage ratios, as well as adjustments tied to changes in the expected lives of the debt, a dynamic known as convexity, according to analysts from Credit Suisse Group AG to JPMorgan Chase & Co.




Now, Fidelity’s Irving said, “what was once deemed QE Infinity is no longer viewed that way.”

It seems that just as the NYFed attempts brief reverse repo open market operations to judge the market's 'tightness', this was an exercise in judging the market's ability to withstand any monetary free-money support... and it certainly sent a loud and clear message to the Fed.

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Honey Badger's picture

Reality changes slowly, perception turns on a dime and perception drives markets.

THX 1178's picture

Status quos are deceiving. Tipping points are very real.

espirit's picture

Blood in the streets?

Meh, still not buying it.

Pinto Currency's picture


Right on Honey Badger.

Bernanke claims that he can modulate something that is binary and either on or off.

By sticking a finger in, it has sucked his whole body in and if he tries to get out, it collapses.

max2205's picture

Ben owns my 3.5% note...3 seconds after I signed with wells Fargo. ...dont feel bad for him...he doesn't care right

derek_vineyard's picture

i'd need a 10-12% return to enter the mbs market----based on actual consumer credit and housing prices

and that would be after the crash should the Fed exit

Handful of Dust's picture

Lowest rates you'll get in my neck of the woods is 5.46% and that's with Stellar credit, a solid job and usually with some assets with that instituion.


Fo rmany other, the mortgage rate has soarding to 6-7%. But don't worry, the seller/builder won't tell you the total  youi owe...they'll word it "how much can you afford to pay each month" so the Average Sheeple has little clue he/she is being raped.

TruthInSunshine's picture



The "Bernanke put" pressure on the Fed, skyrocketing higher (along with interest rates & volatility & asset bubbles)


Difference is, as long as you're not playing in the world's most rigged casino, you stay drier.

LiquidityandLunacy's picture

Your neck of the woods would be where in detroit/foreign country?


If not, I call shennanigans.


Dingleberry's picture

So when Bernank annonces QE whatever next week, will those that shorted today get massacred?

SWRichmond's picture

Maybe Markit will make the MBS / CMBS indices publicly available again...

...or not.

Jake88's picture

Perception turns on a dime, but long after reality has already changed.

YuropeanImbecille's picture

I love the FED! Bernank come and sit in my lap, will ya?

LetThemEatRand's picture

Only the Bilderberg group are allowed in that particular VIP room.

espirit's picture

Or at Davos, Swissie for "Den of Thieves".

TeamDepends's picture

Or Bohemian Grove, where they pack fudge for sport.

OutLookingIn's picture

and run around in pirate costumes, while flying the cross and bones flag,

FL_Conservative's picture

"The Fed, at times during this period, was the only outlet in terms of demand for securities,"


Let's pause and reflect on THAT for a minute.  Any more evidence that what you're doing isn't working, Ben??

Catullus's picture

It quite clearly means that it's Alan Greenspan's fault. And that this is not some "market failure" like he claimed in 2008.

When he says "prove it", there's no better case than just asking a mortgage bond trader.

moneybots's picture

Greenspan was the market failure.  It was his housing bubble which burst.

i-dog's picture


"what you're doing isn't working, Ben?"

That depends on your understanding of what he's trying to achieve (on behalf of his private employers)!

Why not pause and reflect for a moment on how a small group of private bankers (known as The Fed) have been creating trillions of dollars out of thin air and using them to purchase ALL traded mortgage securities in the US. What could possibly happen to all that property if, for some reason - like an economic collapse, all those mortgagees were unable to discharge those mortgages on demand? Hmmm?

FL_Conservative's picture

i-dog, I agree with you except as to WHO is pulling the strings here.  I think that Bernanke is the "convenient fool", who plays the role of the academic (ideologue) front man, while the real culprits that should be called out are the TBAC.  They play to Ben's vanity and provide him with the detailed action plan for monetary policy.  Then they can shuttle the insider info bank to their respective CEO's to manage their investment strategy accordingly.

nickels's picture

An economy is a cybernetic system. Ben has broken the thermostat.

NoDebt's picture

Funny how that whole bad-mortgage mess never really went away, no matter how long they cooked the books or used Mark-to-Unicorn accounting to cover the losses. 

Hedgetard55's picture

No way Ben coulda node that his plan would destroy the bond markets.

disabledvet's picture

i think the (obvious) lie was that the Fed had any control over these markets to begin with. we'll see if "all power is now diverted to shields" as the media demands "light speed in 5 minutes Scotty or we're all dead." obviously leverage is death...and that's Wall Street's Great Facsimile of Wealth...namely "you can borrow with impunity forever." it only works folks "for a time" if they can convince your Government just the same. simply put that is PURE lunacy in the end however as the their no good collateral go lend against anymore. prices are FALLING. i'm suppose to short debt? hahahahahaha! sure...they're probably be "right" in the sense that "i just flew my car off a cliff with me in it...but i have this really cool insurance policy i just bought on my car!"

LetThemEatRand's picture

"we'll see if "all power is now diverted to shields""

When Kirk got really desperate, he would resort to the self-destruct sequence....

LetThemEatRand's picture

Very fitting analogy.  Geithner is obviously Spock.   The Bernanke is Kirk (or the Picard).  Lagarde is some Romulan guy.  Michelle is Worf.  Obama is a generic red shirt.   Biden is Harry Mudd.   Goldman Sachs/JP Morgan are the Federation from which all of these characters take their orders.  

Tulpa's picture

Can't wait for the Tribble Standard.

MisterMousePotato's picture

Yeah, but there's trouble with tribbles.

max2205's picture

1994?   Shit. We got 6 more years of up SPY....WEEEEEE

q99x2's picture

Glad that is over. BTFD

Catullus's picture

When a bond trader says "the only buyer is the fed", this means these loans wouldn't be made unless the fed was active in the market. It's the single biggest indictment of the "Fed doesn't cause bubbles, the market does" argument. The people trading these things wouldn't do it otherwise.

That there are still bearded, well-heeled, academic Keynesians telling us that's not the case and still being taken seriously is hilarious.

ekm's picture

As reminder to everybody, the Fed may buy bonds, but the Fed cannot do mortgage payments, hence the Fed cannot consume the houses.


So, if the gov wanted a revival of the housing market, the gov would want prices to go.....lower...not higher so they can be affordable.


But, again the issue is .......collateral based system. A lot of bets called MBSs are based on housing prices going higher otherwise ..collapse.


Conclusion: Lower house prices are the only inevitable solution.

Tripple Lehman coming soon

Heroic Couplet's picture

Exactly. The way to put more Americans into a house is to LOWER the cost of the house. The whole housing bubble was for bankers. Let the bankers take it on the chin. No one on Main St gives a crap about Wall St.

ghostzapper's picture

They'll never be able to unwind these dogshit MBS positions.  Who in their right mind will buy them?

So, aside from personal shame and a hit to your credit, why on earth would anyone pay their mortgage???

Full disclosure:  no stake in this game me and my girlfriend currently rent but we would like to scoop up a nice loft space when our city takes the next inevitable leg down.   

Heroic Couplet's picture

Send US jobs offshore and the US middle class is going to default on mortgages and everything else. Common sense.

Unknown Poster's picture

Markets are so distorted from the FEDs intrusion, there is no way out.  If the FED stops buying MBS rates skyrocket. If they continue with QE the repo market implodes. Time for squirming.

starman's picture

Should we call it the Federal housing recovery and the Federal backed mortgage securityes and the Federal this the Federal that!? The Federal States of America. We're done.  

max2205's picture

You've been federated. ....

Oh regional Indian's picture

What you've been is con-federated.

Double plus good...

robertocarlos's picture

When are REITs going to crash? There's a bunch of them buying every real estate property in sight and they think they are financial geniuses.

NeedleDickTheBugFucker's picture

GNMA bonds, which have an explicit government guarantee, fared slightly worse than FNMA bonds.  VFIJX down 2.86% on a total return basis in Q2.

AbbeBrel's picture

I wonder how Kyle Bass is doing.   He has been talking up non-agency MBS as a good deal, along with the Japanese stuff (which is all anybody wants to talk about he says).

DealBook: Once Shorting Subprime, Bass Now Bullish on Mortgage Bonds - Mr. Bass now thinks some of the worst bonds, those which are not backed by the government mortgage giants Fannie Mae and Freddie Mac, could yield 14 percent in the coming years.

Maybe he has temporarily changed his last name to "Hoover" :-)  (in the British sense, not in the former POTUS sense).

involuntarilybirthed's picture

Take out a mortgage from the bank, you make payments, the bank collects interest, all is good.   Why does the fed need to be involved with this process?   They don't need to package/resell them.  I like things simple, what happened? 

OneTinSoldier66's picture

Forget it simpleton. You see I'm a Banker and have a degree in Economics from an Ivy League University. And the financial system is just too complex for an average person such as yourself to understand. And as a Banker, with a peice of paper from an Ivy League University, I intend to keep things the way they are. It's in my best interest to do so. "We" all need the financialization and securitization of everything here so that "we" have power and control. You simpletons are not supposed to have power or control of your own destiny. You simpletons are supposed to concentrate on doing everything that's for "the greater good", like us bankers.


Just in case it's not clear, this was --> /sarc