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Mortgage Spread Collapses... More

Tyler Durden's picture


Since QEternity was announced, the spread between the 30Y mortgage and 10Y Treasury has collapsed from an already very tight (in anticipation of QE3) level to simply incredible levels. Following our comments on Friday about the relative 'safety' of mortgages over Treasuries, the compression from over 60bps pre-Ben to a mere 22bps now is incredible and just highlights how entirely distorted any signaling from any rate market has become. The point remains that lower absolute mortgage rates (which are notably not as exuberant as this relative risk spread would suggest) have not in the recent past provided notable pick-up in the new home sales (which is where real growth in the economy comes from) and furthermore, the benefits to the consumer of further mortgage rate cuts (based on recent JPMorgan work) is around $5bn per annum for every 25bps improvement in the mortgage rate (a drop in the ocean for a consumer who spends $11 trillion per year).

Mortgage spread over TSYs...


Chart: Bloomberg


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Mon, 09/17/2012 - 09:50 | Link to Comment PrintingPress
PrintingPress's picture

Did the printer run out of ink?  Give the toner a shake and see if we can't get that a little higher.

Mon, 09/17/2012 - 09:58 | Link to Comment nope-1004
nope-1004's picture

In other words, Benocide lied.  QEp is nothing but a bank bailout - again!  Does nothing to stimulate the economy, help the taxpayer, or the unemployed.


Mon, 09/17/2012 - 10:03 | Link to Comment AUD
AUD's picture

It stimulates it alright, like porno. But like porno, it doesn't really do you any good.

Mon, 09/17/2012 - 10:06 | Link to Comment slackrabbit
slackrabbit's picture

...but it is cheaper and you don't have return any calls...

Mon, 09/17/2012 - 10:17 | Link to Comment Shizzmoney
Shizzmoney's picture

And like porno, you only need it for 5 minutes.

Mon, 09/17/2012 - 13:31 | Link to Comment TruthInSunshine
TruthInSunshine's picture



"...have not in the recent past provided notable pick-up in the new home sales (which is where real growth in the economy comes from) and furthermore..."


C'mon, Zero Hedge, you're way better than this rubbish.

A significant and real growth in the number of JOBS, JOBS, JOBS, along with INCREASING REAL WAGES, INCREASING REAL WAGES, INCREASING REAL WAGES, is where real growth in the economy comes from.

New home sales/purchases (and sales/purchases of everything else, meaning higher levels of economic production and activity) are a consequence of MORE JOBS and DECENT WAGES (and not low interest rates, as the Fed would like everyone to mistakenly believe).

In the 80s, people purchased massive numbers of homes with 9%, 10% and even 12% mortgage rates BECAUSE THEY HAD SECURE JOBS AND WERE SEEING REAL WAGE GAINS.


WTF BITCHEZ. I'm tired of correcting this glaring misnomer. Is everyone going to swallow the kool-aid that herd mentality in chasing credit-based asset purchases is the cause, rather than consequence, of real economic growth result from MORE JOBS and GREATER REAL WAGES?

Mon, 09/17/2012 - 14:39 | Link to Comment NotApplicable
NotApplicable's picture

Not all Tylers are created equal?

Mon, 09/17/2012 - 15:02 | Link to Comment flattrader
flattrader's picture

Yes.  New housing is at best a secondary or tertiary tier activity to primary industrial/agricultural/technological production.

(I think some of the Tylers are young and unaware of this.)

But we don't make much of anything anymore.  So, you can see why people now think that new housing is a "primary" industry...and that the "economy" won't recover until "housing" recovers.

And on a related note, are the Chinks gonna wreck all the Jap plants in Chinkland where all my technology goodies come from?

I can only hope so...and that the morons involved in off-shoring it bring the manufacturing back on shore...however unlikely that may be.

Maybe then housing will actually recover.



Mon, 09/17/2012 - 10:23 | Link to Comment Quinvarius
Quinvarius's picture

Yep.  They had to put their JPM whale trade bailout on the books and make it legit.  I wonder how much they over paid JPM for garabage MBS to balance out the whale trade losses?  I wonder how much new MBS derivatives JPM created just for the Fed to buy? 

It can't stop.

Mon, 09/17/2012 - 10:51 | Link to Comment johnjkiii
johnjkiii's picture

So, you're surprised by this?

Mon, 09/17/2012 - 11:12 | Link to Comment aerojet
aerojet's picture

I stated almost the exact same thing in a couple of the QE3 threads last week--but BB didn't lie, he told us exactly what he was doing. QE has always been about making the balance sheets look right from an accounting perspective so that big banks don't have to declare bankruptcy and so .gov can keep running big deficits.  The other issue is debt monetization so that they can have the appearance of growth.  Repeat this in your head:  Debt is money, debt is money, debt is money.  If people and businesses aren't borrowing, and the Fed still wants "growth" (not in terms of a healthy economy) then the only move they can make here is to monetize.  I'm slowly backing away from the hyperinflationist camp based on what I'm seeing.  That "money" can never make its way into regular people's pockets, because it is just an entry on a balance sheet, so then the only price inflation that will take place is in whatever the biggies are doing with those excess reserves. I do suspect that the rise in commodities is somehow related to a select few being able to use some of that money-that-is-not-money to make trades? 

My take on all of this is that the Fed in engaged in a massive shell game and that they eventually become unable to stimulate this sort of "growth"(again, that word is a loaded term--it's not real growth, it's simply debt growth, where they think all debt is created equal, but it isn't), anyhow, the Fed will not be able to keep their growth curve rising because everyone is still deleveraging and paying off debts and looking for safe havens, which is all deflationary in nature.  This is a really weird situation--the Fed is fighting deflation and hurting the little guy so that the big banks and Big Government can maintain their status quo.  It is doomed to failure at some point, it has to be.  What they should do is figure out a way to have deflation without destroying civilization, because that's what is giong to happen regardless, only a matter of when. 

Mon, 09/17/2012 - 11:57 | Link to Comment MachoMan
MachoMan's picture

Don't be concerned with choosing a side in the inflation v. deflation debate.  They're both just different points on the same timeline.  Please do not discount the fact that both camps may be correct (with the deflationists likely winning the first round).

The fact that the money multiplier is low is probably only indicative of a difficulty in igniting wages or growth...  However, price inflation (note: different than "inflation" given prices may fluctuate regardless of the amount printed) may still occur through cost push...  e.g. rising input costs that get passed down the supply chain.  As a result, inflation really is tied more closely to monetary prolifigacy than whether there is a direct and highly efficient transmission mechanism to the economy proper.  In other words, some of it spills over regardless of how broken the system or desire of banks to "save".

I also dispute that a deflationary scenario is necessarily any more destructive than killing the currency.

I think a lot of what you've written is from the perspective of someone who has let others frame the parameters of the debate.  I think Hank would have won you over with his sales pitch.

Mon, 09/17/2012 - 10:00 | Link to Comment GetZeeGold
GetZeeGold's picture



Give the toner a shake


Spike the toner......time to be aggressive.


Mon, 09/17/2012 - 09:59 | Link to Comment CPL
CPL's picture

It's Oil prices.


Higher pump price = Higher mortgage rate failure in the western world.

Happened in 2007, 2008, 2011. This isn't a surprise, fail train pulls into the station every time WTI scrapes it's teeth on 100.

Mon, 09/17/2012 - 13:19 | Link to Comment jerry_theking_lawler
jerry_theking_lawler's picture

the fail train makes me yurn for the return of 'da Soul Train....

Mon, 09/17/2012 - 10:04 | Link to Comment slackrabbit
slackrabbit's picture


"Its ok Ben, when you run out ink you just use the blood of peasants"......different ink, same outcome...

Mon, 09/17/2012 - 12:32 | Link to Comment Bunga Bunga
Bunga Bunga's picture

Don't worry, Ben already ordered one of those cheap refills on ebay.

Mon, 09/17/2012 - 09:54 | Link to Comment Frozen IcQb
Frozen IcQb's picture

Although QEternity is cute, that's QE to Infinity.

Let's give credit to Jim Sinclair who coined the term years ago.

Mon, 09/17/2012 - 09:53 | Link to Comment Robslob
Robslob's picture

So...this is good?


PS  Real growth DOES NOT come from housing for fucks sake.

Mon, 09/17/2012 - 10:01 | Link to Comment nope-1004
nope-1004's picture

But real pain comes from a housing collapse, along with an increase in debt servicing costs, after the binge borrowing in housing that we've had over the last 10 years.


Mon, 09/17/2012 - 09:59 | Link to Comment CPL
CPL's picture

Shhhh, don't tell people that.  They might get wise.

Mon, 09/17/2012 - 09:56 | Link to Comment Sudden Debt
Sudden Debt's picture

It's like we're running out of sharts that point up these days...


Mon, 09/17/2012 - 19:38 | Link to Comment unununium
unununium's picture

Nice to have you back SD.

Mitt Romney is treading on thin ice calling Obama the "foodstamp president."  Doesn't he know that is 47 million votes?

Mon, 09/17/2012 - 09:57 | Link to Comment JohnKozac
JohnKozac's picture

House sales produce nothing except commissions and more toxic mortgages that Ben (aka taxpayers) will have to buy. Manufacturing produces growth.

Furthermore, selling zero down houses to people ---50% whom will default---is not very productive.

20% down stabilizes the house market (like it did in the 1980s) down does not. Handing houses to people who cannot afford them just perpetuates the housing problems for another decade.

Mon, 09/17/2012 - 10:03 | Link to Comment smithcreek
smithcreek's picture

yeah, but manufacturing produces all sort of icky stuff that's bad for people and the environment, so I've been told.  The government should just give everyone green jobs, then everyone would have money and the environment would be happy.  Seems simple enough to me.  (do I really need to put sarc after that?)

Mon, 09/17/2012 - 10:06 | Link to Comment Spastica Rex
Spastica Rex's picture

No, built in obsolescence and compulsive trinketry buying is required for a healthy economy. If you're not careful, someone might call you a socialist or a fag. Go buy a new iPhone 5 and wave it around so people know you're not.

Mon, 09/17/2012 - 09:58 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Boom motherfuckers.  Now go out and produce something of real value.  Once I get back from the lake, I can pay you in silver.

Mon, 09/17/2012 - 10:28 | Link to Comment CPL
CPL's picture

It is looking more and more like that everyday isn't it.

Mon, 09/17/2012 - 10:01 | Link to Comment Bob
Bob's picture

Does the consumer actually enjoy increased disposable income due to lower mortgage interest rates, though?  Sure, on refi's he does. 

But overall it props/drives up housing prices, actually, no? At least where sales are concerned.  

Seems to me that wrt the consumer, it's net zero at best.

Mon, 09/17/2012 - 11:04 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Unfortunately, wages do matter.

Mon, 09/17/2012 - 11:23 | Link to Comment aerojet
aerojet's picture

The problem with doing a refi is all the fucking fees.  I've refinanced 2X now, I'm done with that and will just pay down principal instead.  People do those "no fee" refis only to find out that they fees get rolled into the loan itself.  No thanks!

Mon, 09/17/2012 - 10:03 | Link to Comment KidHorn
KidHorn's picture

There goes the private mortgage market. Or what remained of it. No bank is going to loan at 22 bp over t-bill.

Mon, 09/17/2012 - 11:13 | Link to Comment Its_the_economy...
Its_the_economy_stupid's picture

IF Benny promises to buy, the banks will flip paper at any interest rate so long as they pop 2-5% origination fees.

Mon, 09/17/2012 - 14:12 | Link to Comment flattrader
flattrader's picture

Yes. It's about the's always been about the fees.

These motherfuckers aren't holding this paper now, just like they weren't holding before 2008.

Mon, 09/17/2012 - 10:07 | Link to Comment Lucius Corneliu...
Lucius Cornelius Sulla's picture

Will the FED be able to put a floor on housing prices?  If there is going to be run away inflation then perhaps the smart move would be to take on a big mortgage.  The bait is set.

Mon, 09/17/2012 - 10:33 | Link to Comment Arnold Ziffel
Arnold Ziffel's picture

1 problem:

Rates rise (regress to the mean upward);

House prices fall/correct (regress to the mean) due to higher mortgage rates.

I'd rathe rpay the higher rate for a much cheaper priced house.

Mon, 09/17/2012 - 11:50 | Link to Comment Seasmoke
Seasmoke's picture

correct ! ..... +9.625%

Mon, 09/17/2012 - 11:28 | Link to Comment aerojet
aerojet's picture

The trap is set--on you.  You take on a big mortgage and then lose your job (cash flow) and become underwater and then you end up just like all those schmucks did in 2008.  I would suggest you not make financial moves based on macroeconomics.  You can't win at their game, no matter what you do.  It's always better to be debt-free and not in someone else's trap.  It might be interesting if mortage rates hit 0%, but even then, you still have the problem of the property depreciating in value.  To me, a mortgage is no longer "good debt" if ever there was such a thing in the first place.  Our minds have been warped by those seeking to make us into suckers.

Mon, 09/17/2012 - 10:09 | Link to Comment strangeglove
strangeglove's picture

Quick through some toilet paper in I like watching it go down the shitter together.

Mon, 09/17/2012 - 10:13 | Link to Comment LongSoupLine
LongSoupLine's picture



duh...QE3+ is a panic derivatives backstop.  Why else would this shit be pumped at multi-year "market' highs?

Mon, 09/17/2012 - 10:16 | Link to Comment RazvanM
RazvanM's picture

The new Fed mandate is to make sure that the Sun shines at least half a day per 24 hours. If not, then print some Qn to stimulate it. Or maybe print some new sermons. Now, all of you infidels, pray in the Fed church if you want the Sun to shine!

Mon, 09/17/2012 - 10:27 | Link to Comment Spigot
Spigot's picture


The Whale (cumulative debt overhang) and those who own the Whale now will be relieved of their "investments" and be given freshly printed money.

Ergo the most foolish who took on the debt ( end borrowers for real estate, etc) will be crushed by the re-investment of that freshly printed money which will flow into the MoMo of inflation chased real commodities: energy, productive land, metals.

Those who are rewarded are those who manufactured the debt, those who invested in the debt (bought bundles debt based securities).

Every MBS that the Fed buys puts the ultimate ownership of those real assets into the hands of the private corporation named the "Federal Reserve". IE - the FED becomes the owner of the underlying properties and businesses.

The FED is a creature of Congress, and therefor the ownership of all MBS encumbered properties can very well go to the US government via its proxy, the FED.

Mon, 09/17/2012 - 10:36 | Link to Comment LawsofPhysics
LawsofPhysics's picture

"The FED is a creature of Congress, and therefor the ownership of all MBS encumbered properties can very well go to the US government via its proxy, the FED."

Bullshit, the Fed is a Private Bank, it has shareholders and owners.  The taxpayer is on the hook, via CONgress for any U.S. debts owed to the Fed.  Get it fucking right, this banks owns more than U.S. debt by the way.  The U.S. has been paying the Fed interest to coin it's money for over 100 years supposedly in exchange for "price stability" and "stable employment".   How is that working out for everybody?  End the damn Fed.

Mon, 09/17/2012 - 10:39 | Link to Comment shuckster
shuckster's picture

Calling the Fed private is just arguing semantics. The Fed and the US gov derive their power from the same source 

Mon, 09/17/2012 - 11:01 | Link to Comment Alex Kintner
Alex Kintner's picture

So if the Fed buys up all these MBSs from the banks, then the MBSs become virtually worthless because the underlying mortgages default, who takes the loss of those MBSs? I always thought it was the taxpayers. But from your comment, apparently not.

Mon, 09/17/2012 - 12:14 | Link to Comment aerojet
aerojet's picture

Virtually worthless?  They're completely worthless.  They're creating worthless money out of thin air to buy worthless MBS instruments.  Maybe you can't take a loss on something that is a zero?  The whole thing is designed to hide the fraud that took place with regard to MBS derivatives and paper the whole thing over.  We should have prosecuted the people involved wholesale and then shutdown the big institutions that failed and then the whole thing would be out in the open and we could begin to heal the US economy.  Instead, we are going Japan.

Mon, 09/17/2012 - 10:32 | Link to Comment Crtrvlt
Crtrvlt's picture

"new home sales (which is where real growth in the economy comes from)"  


right on


this is when the economy will pick back up- when the housing market does (if ever). just from a demographic perspective, the amount of ppl per house now is higher than it historically is (i think above 2.7 vs a historical 2.4 or so-very rough estimates)  at some point this will reverse as not everyone can hold off having a family, living at home with parents etc forever.  if it doesn't than that's just a reflection of a real systemic problem this nation is facing.  a very good possibility

Mon, 09/17/2012 - 10:36 | Link to Comment tradebot
tradebot's picture

If I were king...first, abolish the EPA, reform it as something more reasonable...mandate Natural gas into the trucking industry, over five years establish the infrastructure to facilitate re-fueling (which would create millions of jobs) from diesel to nat to follow at 50% of new by 2018.  Go with a two year No Tax on any business that qualifies as manufacturing and a three year no payroll or corporate tax on any manufacturing business started as soon as the new rules get on the books.  The new business could pay labor a portion of what the goobermint has been taking from them (win, win)...could be a great partnership between management and labor...  This whole place would go nuts wild!!!  American quality used to be the envy of the might take a while to teach these new keyboard kids how to build something...there in lies the doubt.

Mon, 09/17/2012 - 10:45 | Link to Comment Sudden Debt
Sudden Debt's picture

If I where King, I'd have 5 mistresses, take 12 month vacations and don't give a flying fuck about all that economic stuff because the paychecks fly in never the less.

Mon, 09/17/2012 - 15:05 | Link to Comment Papasmurf
Papasmurf's picture

The position of POTUS is already taken.

Mon, 09/17/2012 - 10:52 | Link to Comment Flakmeister
Flakmeister's picture

Let me guess, you claim to be a "free market believer" and decry gubbmint interference in the economy....

Rolls eyes....

Mon, 09/17/2012 - 11:04 | Link to Comment tradebot
tradebot's picture

Yes...I am a free market thinker...those things would happen automatically if it weren't for goobermint intervention...of course I live in the real world and not in a naked short one.  Making widgets that are tangible in value just makes more sense, roll your eyes if you need to, but we can't all be in the wagon as they say.  And while I'm on a good rant, Emanuel should pull a Reagan on those whinny teachers...then pass out the tin cans, because if they can't teach (and I use the term teach loosely) it would be fun to watch what the useless would do for a living.

Mon, 09/17/2012 - 11:34 | Link to Comment Flakmeister
Flakmeister's picture

Re: Free market, well, you are a hypocrite or ignorant then.... hell, probably both...

For shits and giggles, can you tell me whether the US is currently a net importer or exporter of NG? And how much would NG production have to increase if one were to replace 10% of current oil consumption? (on a purely BTU basis)...

Moreover, Mr. Free market, could you quantify the indirect subsidies that the trucking industry currently recieves? Or the direct subsidies that the Fossil fuel interests recieve annually from the goobmint?

You would agree such subsidies distort the market, would you not?

Mon, 09/17/2012 - 10:43 | Link to Comment Sudden Debt
Sudden Debt's picture




Mon, 09/17/2012 - 10:47 | Link to Comment Watauga
Watauga's picture

Can someone tell me how this impacts the sale of my house?  Seriously, how many Americans contemplating the purchase of a house will read that article or have any idea what it means?  All they care about is whether they can get the loan to buy the home--not what is behind it.  And they will listen to the Party line anyway, so all will appear to be wonderful from now until Obie is re-elected.

Mon, 09/17/2012 - 10:58 | Link to Comment Catullus
Catullus's picture

It means raise the asking price for your house

Mon, 09/17/2012 - 11:00 | Link to Comment Long-John-Silver
Long-John-Silver's picture

Can someone tell me how this impacts the sale of my house?


Bernanke has guaranteed you will never sell your house.

Mon, 09/17/2012 - 10:50 | Link to Comment fijisailor
fijisailor's picture

Can anyone please explain this to me?  Why is this spread important?  I must be dumb because I just don't get the significance of this.

Mon, 09/17/2012 - 10:57 | Link to Comment Catullus
Catullus's picture

Because the bank makes money in theory by borrowing money and lending it out. So you take a benchmark long term rate and you compare it to the rate that the bank makes on lending. That's the spread. The larger the spread, the more the bank makes and vice versa.

When spreads compress, the bank will make less money lending money out. What they could do to combat this is drive volume through it, but that requires originating more real estate loans. Possible. But we've seen that end badly before. But who cares when the fed's buying, right?

Mon, 09/17/2012 - 10:51 | Link to Comment Catullus
Catullus's picture

As it should. MBS is the new leveraging instrument. They're just as good as treasuries do long as the Fed is buying.

Mon, 09/17/2012 - 11:01 | Link to Comment Admiral Halsey
Admiral Halsey's picture

Just another means of recapitalizing banks.  They own more mortgage product than Treasuries.  Although I'm thinking agency REITs are a better pure play on QE3 then banks, amiright?

Mon, 09/17/2012 - 11:21 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

Once again, QE3 is about financing the government.  To wit: all Fannie/Freddie profits now go to the government.  Two weeks ago, Fannie/Freddie announced they would hike gfees for the second time this year, by another 10bps, on top of the 10bps from earlier this year.  There are more gfee hikes to come.

Those 20bps of hikes translate pretty directly to a 20bps increase in mortgage rates.

At the same time, the FHA has been hiking their insurance fees, which amount to the same thing as a gfee hike.

All that money goes to the government.

So mortgage rates are rising as the government charges more.  So what to do?

The Fed prints money to bring rates back down to offset the money the government is collecting.

Ergo: indirect, but very real financing of the government.

Mon, 09/17/2012 - 11:45 | Link to Comment Snakeeyes
Snakeeyes's picture

Yup, from over 100 basis points to 35 basis points. But let's see how the logjam at servicers will play out.

Sat, 09/22/2012 - 23:11 | Link to Comment radicall
radicall's picture

All well and good with the spread there, but more of the issue is rates offered to people who want to refi mortgages. That spread is still at 150 bps. 


So if you are a banker - figure out a way to bet on some convergence there (give out as many 3.5% 30 year loans as you can and sell them to fannie)


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