Suddenly, Wall Street Is Bailing On Housing

Tyler Durden's picture


Among this week's most notable moves was the decompression of high-yield credit spreads to near 9 month wides (and continued outflows). What went notably-under-reported by the mainstream media, however, was an even bigger selloff in US mortgage bonds. While JPMorgan is unable to see "any fundamental reason" for the plunge in prices, the worrying indication from the magnitude of the drop relative to volumes is that liquidity has evaporated. As Bloomberg notes, with dealer inventories sold down (due to new regulations that make repo and agency securities unpalatable), they have no way to 'smooth' the selling when investors want to exit positions. Weakness of this magnitude when the 10Y gained only 2bps on the week is a big wake-up call that traders are looking for the exits from housing debt and the door is very narrow.

Bloomberg warns, prices of a new type of U.S. mortgage bonds are plunging this month, teaching investors a lesson on the risks to markets wrought by the growing constraints on Wall Street banks.

*  *  *

Here's why...

Thanks to the Fed, turnover and volume in Agencies has been crushed...


as turnover in most markets depends on repo (remember how important we explained repo was?)


because Fed/regulators have made agency/repo uneconomic...


Bloomberg explains,

Dealers have reduced their bond holdings in response to rules ranging from the international Basel III accord on banks’ capital to the U.S. Volcker Rule limiting their ability to make bets with their own money. An expansion of Finra’s Trace trade disclosures to more types of debt is also increasing risks and cutting into profits for market makers.


Inventories of corporate securities and other debt without government backing at the biggest dealers fell to $56 billion in March 2013 from as much as $235 billion in 2007, according to the last Federal Reserve data before a change in calculations.

and so dealers have dramatically reduced inventory to cope with market movements...


Bloomberg adds,

As a few holders continued selling the Fannie Mae and Freddie Mac securities without an immediate emergence of investor demand, most of the dealers active in trading the debt “disappeared,” said Vishal Khanduja, a money manager at Bethesda, Maryland-based Calvert, which oversees about $13 billion.


Until recently, “everybody wanted to trade it: I think there were 10 to 12 dealers messaging me and looking to make markets,” Khanduja said in a telephone interview. “It’s partially indicative of the regulations’ impact on their balance sheets.”

None of this matters all the time the virtuous circle continues of billions in Fed money driving down spreads/rates across the board... but when investors get itchy fingers and decide to sell, this happens...


As Bloomberg reports,

the $8.2 billion of risk-sharing securities sold in the last year by government-controlled Fannie Mae and Freddie Mac can shift their losses from homeowner defaults to bond buyers. One slice of a deal issued in May traded at 95.7 cents on the dollar yesterday, down from 99.7 cents at the end of last month, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

A plunge like this in one specific mortgage bond as small doors and large crowds do not play well with one another.

*  *  *

As Bloomberg adds,

“It could be symbolic of what could happen more broadly in a real ‘risk-off’ environment,” Bill Murray, a New York-based money manager at $14 billion hedge-fund firm CQS, said in an interview.

There is little that the dealers can do if the selling continues on Monday as 'any' credit risk positions are unwound. The problem is that the Fed's dominance of the market and unintended consequences of controlling the repo/shadow-banking system have left bond markets more fragile than they have ever been.


Charts: FINRA and Citi's Matt King

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Fri, 08/01/2014 - 21:38 | 5036180 blindman
blindman's picture

Graham Nash - Songs For Beginners (Album, May 28,1971)

Fri, 08/01/2014 - 22:01 | 5036237 nope-1004
nope-1004's picture

Good luck house flippers.   Couldn't happen to a nicer crowd of idiotic speculators that thought the next buyer will be clueless about value with unlimited credit.  My heart also goes out to the realtors that claim to sell houses when in fact they sell mortgages for the TBTF.

Fri, 08/01/2014 - 22:16 | 5036296 Slave
Slave's picture

My cock is large.

Sat, 08/02/2014 - 00:09 | 5036593 ebworthen
ebworthen's picture

Slave said:  "My cock is large."

Mine too, but not nearly as big as Wall Street's. 

They can crash the entire lives of nearly every American and Citizen of the World yet be rewarded with bailouts, austerity, and a "Get out of Jail Free!" card.

Jesus H., they are doing it again, a five year pump then dump, and they'll get away with it again.  I'd say hang and draw-and-quarter the bastards but they own the police and military.

Sat, 08/02/2014 - 00:27 | 5036639 CrimsonAvenger
CrimsonAvenger's picture

Are you sure they'll get away with it again? I don't see how they can be bailed out at this point. Sure, I probably suffer from a lack of imagination, but what is the fed going to use this time to shock and awe us, without every other country throwing in the towel on the dollar?

Sat, 08/02/2014 - 02:15 | 5036778 bankerbackbacon
bankerbackbacon's picture

Crimsonavenger: I probably suffer from a lack of imagination, but what is the fed going to use this time to shock and awe us, without every other country throwing in the towel on the dollar?


The Fed will use the world war and lack of gold at FK to "shock and awe," more central skank chicanery will ensue. People will have to choose between the American (USD reserve) way of life or the Zimbabwe way of life and that means an attempt at global domination through "vassals."

"The three grand imperatives of imperial geostrategy are to prevent collusion and maintain security dependence among the vassals, to keep tributaries pliant and protected, and to keep the barbarians from coming together."

Zbigniew Brzezinski


The last two Dictators to stop using the USD were S. Hussein and M. Gaddafi. See a pattern? The big dick pattern (I too wield a sword). An appropriate analogy for white phosphorus on civilian populations.


Sat, 08/02/2014 - 06:31 | 5037001 ebworthen
ebworthen's picture

I have no idea what depths they will sink to this time around.

All I know is last time - they decided that spitting in the face of every responsible hard working bill paying American was A-o.k. with them.

Next time they will probably decide that shooting us in the guts, chest, and head - Man, Woman, or Child - will be A-o.k.

Long as they wave the flag and mumble, speak, and shout about "freedom" and "liberty" and "The Constitution" - while raping all three of them and killing us - they will be as happy as can be.

That is where we are.  If you doubt it you are a dumbshit.

Sat, 08/02/2014 - 09:27 | 5037198 RaceToTheBottom
RaceToTheBottom's picture

Double tap to the head.  They are not heartless....  Oh wait...

Sat, 08/02/2014 - 02:11 | 5036784 Harbanger
Harbanger's picture

I noticed Banks are trying to push loans and mortgages again.  I think it's a push from the Fed to keep pumping the housing sector.  Which means polticians will soon come out in favor of easing lending regulations, and we'll go back to subprime lending to inflate the bubble. I wouldn't short it when the Fed is purposely pumping money into it.

Sat, 08/02/2014 - 02:40 | 5036814 Ariadne
Fri, 08/01/2014 - 22:18 | 5036303 knukles
knukles's picture

Golly gosh and gee willickers.  Some of my good buds in the bond bidnez hold a whole buncha MBS... Implicit guarantees, additional income.... negative convexity... and some heretofore rather narrow spreads over treasuries.
Now, if y'all gotta a buncha MBSs in portfolios that you tout as Treasury only (and some folks do, because they say the GNMA guarantee is full faith and credit, just like a Treasury, so it's pari passu, some even go so far as to say the implicit guarantees on Fannie and Freddie make them OK, too...) you just bought your ass one big problem.  Essentially the same thing as "Utility Finds" which were supposed to hold the high dividend stocks of electric and telephone companies that then bought into the telecom dotcom1.0 madness... and well... another bonus paid, portfolio manager leaves and then the floor falls out from ... and the women and children (let alone the small cuddly animals) get to suck on the hairy end of the lollipop when the decline rushes forth and they are smitten by the Hand of the Investment God of Ill Temper.

Oh, and methinks a few notables are PIMPCO and DoubleLine, for starters ... holding big MBS positions

Including stuff that could be held in Prime funds that shortly will have gates to stop redemptions when the managers deem so important.

And if you dig deep enough, there are a few Big Name short term money market funds still hold paper form the last 2008 shitforshinola in portfolio and have the stuff footnoted in fairy tale language saying essentially, this paper is gonzo alonzo, but we keep it here for appearances sake.

When the shit hits the fan, all assets in one way or another become risk assets... only a matter of degree... 
Treasury bills become the any port in the storm is good enuf for me alternative and like in 2008/9, some bills traded at Negative Yields!
Yes Janet, even mortgages, and in fact some short term investments...
Especially note "short term investments", for every single fucking financial crisis has first manifested itself in the money markets... iliquidity or insolvency.

Just another day between the grindstones

Sat, 08/02/2014 - 00:47 | 5036677 Squid-puppets a...
Squid-puppets a-go-go's picture

I'm not savvy enough to appreciate just how wide this goes - is this the equivalent of the 'Ice 9' that credit default swaps were in 2008?

Sat, 08/02/2014 - 03:02 | 5036839 Professorlocknload
Professorlocknload's picture

Dunno, knuks, but it looks like they plan on breaking the buck this time around, and I see no reason they won't let the Implicits go as well. Because they can. The Prospectuses say so.

But if they trash the Explicits, well, that's outright default. My guess is, that would freeze up the Treasury markets. So I spose I'll stay with some GNMA until I see flames.

Sat, 08/02/2014 - 12:44 | 5037722 lincolnsteffens
lincolnsteffens's picture

Wow, that is a mouthful Knuks! ++++

Sat, 08/02/2014 - 08:10 | 5037079 Ban KKiller
Ban KKiller's picture

MUDD is still in hiding?

Sun, 08/03/2014 - 15:35 | 5041123 Citium
Citium's picture

I am a realtor in Texas. Our office sales land and farms exclusively, we will only take a house if it is a family friend or some situation. If anyone has to get financing we send them to the local banks, not to the TBTF. If people tell us they will be financing through Wells Fargo, JPM or Citi that you will never get your financing, and this is why you need to go local and get it done quickly with a local touch.

A lot of realtors are guilty of pumping bubbles and selling mortgages for the TBTF, that is true. But know some of us out there are trying to be good people and do the right thing for liberty and life. We push land because land is the only asset that can naturally multiply income and sustain life. Being from Texas, we get A LOT of people from the West Coast and the NorthEast, especially areas like Massachusetts, Connecticut and New York. West coast is mostly California with some Washington people as well.

They are awake and we are very open in our office that we are in another bubble and buying a McMansion is a bad idea and instead invest in a little smaller home but with 100 acres to farm or plant timber to cut etc. etc. I just sold a small 3 bedroom frame home on 39 Acres to people from North Carolina. They were ecstatic to be here and commented on "if this goes down, I believe texas will be the place to be. I am not trying to brag," I am just giving examples of how realtors CAN help people and that we are all not sneezy scumbags,.

Sat, 08/02/2014 - 09:33 | 5037209 caShOnlY
caShOnlY's picture


We shall finance them for 6 and 7 and even 8 years then!!!  GREAT!!!  for how much then?........ ZERO PERCENT?????  but  but   but we have to sell cars right? 


Fri, 08/01/2014 - 21:39 | 5036182 Slave
Slave's picture


Fri, 08/01/2014 - 22:15 | 5036291 max2205
max2205's picture

I'll take 'who did they sell to' for 100 billion Alex

Fri, 08/01/2014 - 22:41 | 5036377 SnobGobbler
SnobGobbler's picture

they sold to the fed....derrp!

Fri, 08/01/2014 - 21:40 | 5036186 fonzannoon
fonzannoon's picture

anyone familiar with agnc and why it held up so well during this?

Sat, 08/02/2014 - 00:15 | 5036609 disabledvet
disabledvet's picture

Nope. Something be tellin me they be in the eensurance bizness tho.

Taint no one talkin soft landin ear eether... Nothing but SEEEEEAAALLLLL YER SHIT! straight from Grandma Fed herself! carry-o in that there curvy yield thing a majig.

Lotta HOLY SHIITE! going on here too.

Yepper...looks like an anything goes play is in the offin.

Fri, 08/01/2014 - 21:40 | 5036187 nmewn
nmewn's picture

Smoke from the upper windows now kiddies, wait for the flames ;-)

Fri, 08/01/2014 - 22:05 | 5036263 kaiserhoff
kaiserhoff's picture

Why all the Debbie Downers?  There's prolly two or three weeks left to pick up nickels ahead of the steam roller.

Where's the animal spirits?

Fri, 08/01/2014 - 23:31 | 5036518 kliguy38
kliguy38's picture

make it pre-64 quarters and I might  try to

Sat, 08/02/2014 - 12:04 | 5037558 Pemaquid
Pemaquid's picture

Funny! Speaking of pre-65 coinage, I received a 1957d quarter in change the other day! Bought something for under a buck and received the equivalent of $3.67 back! Life's good!

Sat, 08/02/2014 - 07:54 | 5037065 Tarshatha
Tarshatha's picture


Fri, 08/01/2014 - 22:18 | 5036301 MASTER OF UNIVERSE

What you are saying is so true. And we know that there is no rescue

crew out there that will respond to the chaos that will ensue. This is going to get really weird and intense really fast IMHO.

Sat, 08/02/2014 - 01:49 | 5036762 williambanzai7
williambanzai7's picture

They are smoking weed up there.

Fri, 08/01/2014 - 21:44 | 5036207 Rehab Willie
Fri, 08/01/2014 - 21:49 | 5036217 gmak
gmak's picture

The law of unintened consequences was written by a black swan with chalk on the road paved with good intentions.

Fri, 08/01/2014 - 22:12 | 5036282 Anca1
Anca1's picture

Great line!  I'll probably paraphrase that one in the future.

Sat, 08/02/2014 - 01:43 | 5036754 bid the soldier...
bid the soldiers shoot's picture


And the black swan's name is Murphy.

Sat, 08/02/2014 - 11:20 | 5037454 NickVegas
NickVegas's picture

I gambled all your money, and the black swan ate it. Move along.

Fri, 08/01/2014 - 21:56 | 5036227 IANAE
IANAE's picture

...recalling a Far Side cartoon with a Crisis Clinic building ablaze while floating downriver toward a waterfall...

Fri, 08/01/2014 - 22:03 | 5036252 q99x2
q99x2's picture

I've aged 5 years since this ponzi was supposed to implode. Can we please wait to get the collapse in 2 more years when I'm in Germany F'n studying.

Fri, 08/01/2014 - 22:31 | 5036340 Oldwood
Oldwood's picture

I'm not going anywhere where I can't keep a gun. This could get ugly. Definitely not a good time to be in a foreign land, especially as an American. If this shit really does blow, Europe will likely be the first place on fire and I wouldn't want to be walking down the street in a cowboy hat. Americans will the first to be blamed.

Sat, 08/02/2014 - 03:44 | 5036890 Jano
Jano's picture

you can keep a gun in the whole eu.

unfortunatelly last year they introduced a law for the whole eu, that the gun must be registerred.

until then it was not necessary in FInland France and Austria, only the short weapons under 40cm, revolvers and pistols.

In Austria we have 5M registerred weapons on 8,8M inhabitants. I guess another 5M unregisterred weapons are there out...

Sat, 08/02/2014 - 04:11 | 5036918 22winmag
22winmag's picture

More important than a gun is the will to use it.


Besides, ideas are more dangerous than guns.

Sat, 08/02/2014 - 11:39 | 5037488 BeetleBailey
BeetleBailey's picture

Plenty of places Americans won't be....but those are running out fast.... Americans money....the 99%

Fri, 08/01/2014 - 22:04 | 5036260 novictim
novictim's picture

Nice!  I'd have a glass of Champaigne if I liked that.  Instead, I am enjoying a fine Chianti with Fava beans sauteed with two kidneys from the investor who overbid me last month. 

Afterwards, I will dessert on the brains of the ColdWell banker clown who just jumped out the window by my office.


Sat, 08/02/2014 - 06:30 | 5037005 Wahooo
Wahooo's picture

I assume you are using every part so that none go to waste. The banker fois gras is excellent in the summer months with a light wine.

Sat, 08/02/2014 - 11:11 | 5037428 novictim
novictim's picture

Yummy.  It is kinda hard to find the real bankers these days.  The flunkies who front as "bank managers" arem't usually actual bankers.  They are just glorified sales reps with some modicum of accounting skills.

I'll set my traps at the upscale country club near the winery.  Should be a good haul no matter what I catch.  Really hoping for the fois gras though.

Hey! How long do you force feed the banker fiat currency in order to get the liver to real fatty?  Or are the fatty enough as it is.

Oh, ya.  I know the answer.  Still, shoving a metal feeding tube down a banker clapped in irons is kinda fun all on its own!

Sat, 08/02/2014 - 11:37 | 5037486 BeetleBailey
BeetleBailey's picture

"I have to go now Clarice....I'm having an old friend for dinner...." <click>

Fri, 08/01/2014 - 22:12 | 5036279 DOGGONE
Fri, 08/01/2014 - 22:16 | 5036292 thamnosma
thamnosma's picture

Way too soon to tell if we are entering the collapse, but one must admit it has that flavor.  Lots of things spinning around this week on numerous fronts.  We are just 2 months away from October.  That may be the month to watch.

Fri, 08/01/2014 - 22:42 | 5036381 DOGGONE
DOGGONE's picture

Blame? There are LOTS of doers of intellectual savagery, see here:
And YOU the people are doing citizenshiT if it is too much trouble to get your heads out into the light.

Fri, 08/01/2014 - 23:57 | 5036572 thamnosma
thamnosma's picture

Since I didn't bring up any issue regarding blame, I assume your comment was not directed at me.

Sat, 08/02/2014 - 17:18 | 5038597 oudinot
oudinot's picture

yeah, the attitude the last couple of days have been different, this could be IT

Fri, 08/01/2014 - 22:21 | 5036311 syntaxterror
syntaxterror's picture

The smart money is surging into the Russian markets.


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