2s30s Close Above 400 For The First Time Ever

Courtesy of Gen Ben, we passed another landmark in rates: the 2s30s closed at an all time high of just over 400 bps. Ths is the widest closing spread in history. What does this mean? Simple: instead of taking the inverse method which has worked so well in equities, where banks make money through ever-increasing trading volumes (well not anymore) at the expense of margins, with ever more incursive electronic trading, the Criminal Reserve has decided to pull a Harry Winston and get banks to get their entire P&L from the least amount of transactions (in this case mortgages). Why so? Because as we pointed out recently, mortgage origination and refinancing volume has plunged to the lowest in a year. And with no volume, bankers are forced to make money increasingly more on spread from those who are desperate enough to go through the pain of the entire mortgage origination nightmare, even if (or especially) it means ending up with a mortgage that has no actual mortgage note (yes, that is a factor... in addition to mortgage rates that continue to be close to year highs). In other words expect to see the 2s30s to go even steeper until it is made obvious that banks will no longer make money on the curve. At which point it will be the Fed's obligation to go out and start buying up the long-end in mortgages, just like in March 2009. As stated before, we expect this, together with the required market crash to spawn QE 2.1+ Lite to occur some time in April, May, around the time the extra $195 billion in SFP liquidity is absorbed by the market. In the meantime, the Fed can only hope that stocks continue rising ever higher so as to have as great a buffer as possible from which to enter free fall. And 'trivial' events like Egypt are not allowed to stand in the way.

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