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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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Sun, 06/30/2013 - 10:44 | 3707575 Honey Badger
Honey Badger's picture

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

Sun, 06/30/2013 - 10:46 | 3707581 THX 1178
THX 1178's picture

Status quos are deceiving. Tipping points are very real.

Sun, 06/30/2013 - 10:52 | 3707592 espirit
espirit's picture

Blood in the streets?

Meh, still not buying it.

Sun, 06/30/2013 - 12:30 | 3707769 Pinto Currency
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.

Sun, 06/30/2013 - 12:59 | 3707822 max2205
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

Sun, 06/30/2013 - 13:17 | 3707852 derek_vineyard
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

Sun, 06/30/2013 - 13:46 | 3707915 Handful of Dust
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.

Sun, 06/30/2013 - 15:13 | 3707944 TruthInSunshine
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.

Sun, 06/30/2013 - 16:33 | 3708278 LiquidityandLunacy
LiquidityandLunacy's picture

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


If not, I call shennanigans.


Sun, 06/30/2013 - 11:34 | 3707659 Dingleberry
Dingleberry's picture

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

Sun, 06/30/2013 - 11:41 | 3707674 SWRichmond
SWRichmond's picture

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

...or not.

Sun, 06/30/2013 - 12:25 | 3707761 Jake88
Jake88's picture

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

Sun, 06/30/2013 - 10:45 | 3707578 YuropeanImbecille
YuropeanImbecille's picture

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

Sun, 06/30/2013 - 10:47 | 3707584 LetThemEatRand
LetThemEatRand's picture

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

Sun, 06/30/2013 - 10:55 | 3707597 espirit
espirit's picture

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

Sun, 06/30/2013 - 11:27 | 3707648 TeamDepends
TeamDepends's picture

Or Bohemian Grove, where they pack fudge for sport.

Sun, 06/30/2013 - 18:09 | 3708470 OutLookingIn
OutLookingIn's picture

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

Sun, 06/30/2013 - 10:46 | 3707580 FL_Conservative
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??

Sun, 06/30/2013 - 10:56 | 3707598 Catullus
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.

Sun, 06/30/2013 - 11:47 | 3707686 moneybots
moneybots's picture

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

Sun, 06/30/2013 - 11:23 | 3707643 i-dog
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?

Sun, 06/30/2013 - 12:22 | 3707756 FL_Conservative
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.

Sun, 06/30/2013 - 11:27 | 3707647 nickels
nickels's picture

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

Sun, 06/30/2013 - 11:44 | 3707680 NoDebt
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. 

Sun, 06/30/2013 - 10:48 | 3707587 Hedgetard55
Hedgetard55's picture

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

Sun, 06/30/2013 - 10:52 | 3707591 disabledvet
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!"

Sun, 06/30/2013 - 10:54 | 3707596 LetThemEatRand
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....

Sun, 06/30/2013 - 11:54 | 3707702 Spastica Rex
Spastica Rex's picture

Picard, too.

Sun, 06/30/2013 - 13:12 | 3707837 LetThemEatRand
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.  

Sun, 06/30/2013 - 14:02 | 3707947 Tulpa
Tulpa's picture

Can't wait for the Tribble Standard.

Sun, 06/30/2013 - 16:55 | 3708329 MisterMousePotato
MisterMousePotato's picture

Yeah, but there's trouble with tribbles.

Sun, 06/30/2013 - 13:02 | 3707827 max2205
max2205's picture

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

Sun, 06/30/2013 - 10:52 | 3707593 q99x2
q99x2's picture

Glad that is over. BTFD

Sun, 06/30/2013 - 10:54 | 3707595 Catullus
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.

Sun, 06/30/2013 - 11:02 | 3707605 ekm
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

Sun, 06/30/2013 - 11:12 | 3707628 Heroic Couplet
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.

Sun, 06/30/2013 - 12:47 | 3707802 ghostzapper
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.   

Sun, 06/30/2013 - 11:11 | 3707618 Heroic Couplet
Heroic Couplet's picture

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

Sun, 06/30/2013 - 11:14 | 3707622 Unknown Poster
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.

Sun, 06/30/2013 - 11:14 | 3707632 starman
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.  

Sun, 06/30/2013 - 13:04 | 3707831 max2205
max2205's picture

You've been federated. ....

Sun, 06/30/2013 - 14:20 | 3707991 Oh regional Indian
Oh regional Indian's picture

What you've been is con-federated.

Double plus good...

Sun, 06/30/2013 - 11:16 | 3707636 robertocarlos
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.

Sun, 06/30/2013 - 11:42 | 3707677 NeedleDickTheBu...
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.

Sun, 06/30/2013 - 11:56 | 3707704 AbbeBrel
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).

Sun, 06/30/2013 - 11:47 | 3707684 involuntarilybirthed
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? 

Sun, 06/30/2013 - 12:29 | 3707758 OneTinSoldier66
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

Sun, 06/30/2013 - 13:10 | 3707842 LongBallsShortBrains
LongBallsShortBrains's picture

I caught the sarc, but you still misspelled "wanker".

Sun, 06/30/2013 - 13:40 | 3707900 DR
DR's picture

Most banks don't keep the loans they make but sell them into the securitized market( shadow banking).  The Fed engineered lower mortgage rates to boost the value of existing MBS on the banks balance sheets so capital loss from loan writedowns would  be lower.

Sun, 06/30/2013 - 11:52 | 3707700 moneybots
moneybots's picture

"Take out a mortage 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? "


Alan Greenspan happened.

Sun, 06/30/2013 - 12:01 | 3707719 kito
kito's picture

The markets will adjust to this for now........its when the next irrefutable (even by msm) economic downturn occurs that we will see the shitstorm....fed will have no options, likely won't try, and even if they do....will fail at propping up the economy.....that is when the lack of faith in the fed becomes evident....until then, its all a sideshow.....

Sun, 06/30/2013 - 12:17 | 3707746 fonzannoon
fonzannoon's picture

look for friday as a cue. if they fake a bad number then you know the big money bought bonds at the higher yields and already are riding the way down. if they fake a better than expected number then the big money was using this drop back to unload moar bonds before the next leg up in yields. 

Sun, 06/30/2013 - 12:31 | 3707771 kito
kito's picture

Hey are so right about feeling alien in your area....I'm on the other side of the Hudson and the malls are mad packed........restaurants filled.......housing construction getting jiggy with it...........but then I remember what third world countries look like......pockets of wealth in major cities......and the rest of the country slipping backwards......we are in the nyc area and, barring some acute collapse.........our area will continue to be fairly shielded from the overall decline of America.......go to 50 miles out and it's another planet.....same for most other nations in the world........America the anomaly wont be.....for that much longer.....

Sun, 06/30/2013 - 12:45 | 3707793 fonzannoon
fonzannoon's picture

I can tell you this much Kito, like i was saying last me anyway, the math leads to bad places, no matter how good it looks right now. The demographics in the school system  are amazing. Fewer kids coming in each year. No one in their 30's can afford to live here and the 60yr olds are leaving. It's just rich foreigners moving in. 

I wonder, as time goes on and taxes go up, how much compassion they will have to pay more every year to support a bunch of people who abused the system and moved out of state. 

Sun, 06/30/2013 - 13:02 | 3707828 kito
kito's picture

That's the way it is in large metro never felt a housing bust because foreigners swoop are in long island....plenty of have the 5towns.....Woodbury, dix hills....almost every area is still doing fine....north shore....south shore and in between....

Sun, 06/30/2013 - 13:33 | 3707884 Jake88
Jake88's picture

Tapering will have nothing to do with the state of the economy or unemployment numbers. Language to that effect by the Fed is a smoke screen. Tapering will come period, because the Fed is scared of the instabilities they have created and they see they have not improved the economy.  Any move caused by employment numbers will be short term. 

Sun, 06/30/2013 - 14:55 | 3708058 fonzannoon
fonzannoon's picture

good luck with that.

Sun, 06/30/2013 - 12:28 | 3707766 XRAYD
XRAYD's picture

Great! So Ben can buy "moar" and average down!

Sun, 06/30/2013 - 12:37 | 3707782 Yancey Ward
Yancey Ward's picture

Like Kito above, I think the entire hope is tied to the proposition that there is never, ever another recession.  Good luck with that.

Sun, 06/30/2013 - 13:10 | 3707839 jonjon831983
jonjon831983's picture

Pain comes first... to change the optics of the situation and make people beg for QEMOAR, then new NY Fed chairman will swoop in and add a lot more juice.


Or I guess if it is too painful before then, they will need to juice more.

Sun, 06/30/2013 - 14:10 | 3707967 Tombstone
Tombstone's picture

Sure, when QE is finally dissolved, sometime in the next century, there will be chaos resulting from an overdose of QE madness.  But hey, inflation is low, we are still growing (positive GDP), the stock market is booming, company cash is slopping over the rim of the cookie jar, the welfare state is exploding from the transfer of wealth effect and Tesla's are going hyper-main-stream just in time to save the planet from all those evil oil companies and all that nasty carbon dioxide that kills millions of species, I guess.  About the only thing that could derail this marvelous utopia is the resurgence of dinosaurs.  All that methane and junk from dino crap would really those those dizzy environmental wackos into a tizzy.

Sun, 06/30/2013 - 16:15 | 3708133 Sechel
Sechel's picture

The Bloomberg article  misses more than a few points. Regulators pushed banks to investing in GSE backed mortgages, which further compressed yield spreads. Now that rates are moving in the other direction suddenly the market has rediscovered convexity (gamma) risk which was always there.  This is nothing more than the government pushing an instrument to absurd prices(low yields) and then seeing what occurs when the market reprices assuming that the distortion is removed.

Once again we see the absurdity of price fixing in the capital markets. Price controls only work in the short run. Richard Nion taught us that four decades ago.

Sun, 06/30/2013 - 16:19 | 3708247 Paracelsus
Paracelsus's picture

   Lower interest rates and a bubble will form.The primary dealers cannot be trusted with free money. Higher interest rates and the mortgages in that MBS crap on the FED books will explode.Housing market on west coast propped up by chinese buying real assets for a bolthole for when the SHTF in Beijing.With gold manipulation going on,suppressing the market price,and Japan about to slide under the waves,I keep thinking how vulnerable we are.The FED pulled out all the stops after 9/11 to juice the market higher,the investment banks leveraged up,and then they started cratering in '08.Why can't we be like Vegas? You can't sit at the table unless you are good for your debts.Things have to be able to clear.Someone will have to take a haircut.Risk has to come back into the equation or capitalism is doomed.

Some of the people were clearly wildly optimistic to take on these ARM's. But some people were obviously purchasing a second house as an investment,hoping to flip it in a year or so at a profit.I don't see why this gamble that went bad should be backstopped by the taxpayer.That is not what these GSE's set up by LBJ were designed for.  

Sun, 06/30/2013 - 18:01 | 3708452 mendigo
mendigo's picture

So Ben has people thinking about the end of qe.
The people have made known thier displeasure.
Of course this may all change when Ben goes.
Well not have any major turmoil before the next election.

Mon, 07/01/2013 - 07:00 | 3709417 goldenbuddha454
goldenbuddha454's picture

The only way they can pull QE is to do it silently and hope noone notices.  Fed governors need to create new talking points aimed at allaying all fears that QE will ever end.  They need to tell the people that not only will it not stop, but they will increase the monthly amount from 85 billion to 170 Billion, while at the same time actually halving the amounts and keeping monthly bond buying numbers secret for "national security" reasons like the PRISM/FISA debacle.

Sat, 07/06/2013 - 00:06 | 3725807 slimething
slimething's picture

Is there a website that guarantees their predictions? I'd sure like to know what the future really holds. 

Do NOT follow this link or you will be banned from the site!