A fascinating article from Dave Rosenberg in Monday's Breakfast with Dave.
Once again, this Houdini recovery has involved a situation where mortgage rates have plunged and yet Treasury bond yields have been rising — 30-year fixed rate mortgages have fallen to 4.93% and are sitting are record-tight spreads over long Treasury bonds (see Chart 7). Historically, the average spread is 150bps and this differential is now 20bps. This is remarkable and our concern is that investors who may be exposed to mortgages are at serious risk because there is a considerable chance that these rates will be moving higher over the intermediate term — notwithstanding continued support from Uncle Sam’s pocketbook.
Investors must be reminded time and again that mortgages are callable, Treasuries are not; and we are now in a situation where net of fees, which average 70bps, anyone buying mortgage paper today is receiving a rate that is less than what the borrower is paying, How nutty is that?
Remember — despite all the ridiculous comparisons to the Weimar Republic, the long bond is THE risk-free benchmark interest rate in the U.S. and with State taxes going up, Treasuries are an even further bargain because of their tax status.
Even without the caution about callable securities, why anyone would be rushing into mortgages with the Fed about to pull the plug on buying is certainly a mystery. Are pension funds chasing yield to ridiculous extremes again? Can the Fed's purchasing account for 100% of that silliness?
Assuming the answer to the second question is no, this is yet another one of those reflation risk trades that just will not die, until it does, more than likely all of a sudden, and more than likely sooner rather than later.
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