Fed Fix Works For Now
Kurt Brouwer March 20th, 2008
Here is one report that the traffic jam in the credit markets is easing. Some of the wrecked cars have been towed away. And, now that they’ve been cleared, we can see that other cars really have not been damaged as much as we thought.
And, this report from the Wall Street Journal [emphasis added] also contains a tidbit on the opportunistic investing strategies of Bill Gross and Pimco:
Fed Fix Works For Now (Wall Street Journal, March 20, 2008, David Reilly & Liz Rappaport)
The Federal Reserve’s latest dose of medicine to calm the credit crunch appears to be working as yields in the mortgage-bond market have dropped in recent days.
“Every little bit of support in the mortgage market helps every other single market out there,” said Jim Vogel, head of agency debt research at securities firm FTN Financial. “The Fed, by a combination of actions, is giving people more assurance that things are better for now.”
…Of course, the good news doesn’t mean the financial crisis is over. The mortgage-market calm is fragile and could easily be undone if, say, default rates again lurch higher, another high-profile financial firm fails or more multibillion-dollar write-downs force banks to curtail lending further and seek emergency capital. “There is no such thing as an all-clear siren at the moment,” Mr. Vogel said. “It’s too soon to say, ‘Dismantle your bomb shelter.’”
…Yields on Fannie- and Freddie-backed bonds have fallen nearly a full percentage point since spiking on March 6, a day after Carlyle Capital Corp. disclosed that it couldn’t meet margin calls from some of its bankers. The difference on the yield on 30-year mortgage-bonds compared with a blend of U.S. Treasurys fell to 2.74 percentage points, from 2.87 Tuesday, said FTN. That difference, or spread, compared with a 20-year high of 3.7 percentage points on March 6.
…To combat the fear in the markets, the Fed created a new $200 billion lending facility, allowed brokers, not just banks, to borrow funds and financially backed the Bear Stearns sale. Those actions, coupled with Tuesday’s interest-rate cut, helped to reverse the climb in mortgage-bond yields.
That brought buyers back into the market. Noted bond investor Bill Gross, who manages the $123 billion Pimco Total Return fund at Allianz SE’s Pacific Investment Management Co., said in an interview Tuesday that he was actively buying mortgage bonds…
Bill Gross and Pimco have been opportunistic during this traffic jam in the credit markets as we pointed out earlier (see Pimco March Investment Outlook and PIMCO Buys Citigroup Bonds). The effects of the various Federal Reserve moves are beginning to have an effect in other areas too. Home mortgages rates are heading down again.
It’s too soon to say the credit crunch is over, but it is fair to say that it is easing up a bit.
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