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If you've taken a chance to look at the refi markets, you may have noticed something particular. Despite ultra low interest rates, banks were quite nervous. The only person buying at the moment is the Fed. The only thing the Fed wants is very high quality loans. With the new setup in these banks, things like people not paying mortgages for a few months are potential killers. The banks still have to pay on those loan packages. That delta comes out of their capital...temporarily, but that's where it lies.
By continuing to print money, the risk becomes that the Federal Reserve rate starts to become.....less relevant to the bond and mortgage markets overall. After all, if the only ones buying and accepting incredibly low return rates are central banks...and the only thing the money can be used for is extremely high grade loans....there's a chance that the correlations breaks and we see extremely high interest rates for everyone because it has to cover expensive capital charges. If you want a bank showing a ROE of 10-20%...and there's no issue of supply for the very top of the market, but everything else must hold it's own, you may end up with a very divergent debt market.
That's the other danger of continuous printing. Someplace, somewhere, there's a huge supply adjustment. Getting into that circle suddenly becomes the easiest way to make money...
If you've taken a chance to look at the refi markets, you may have noticed something particular. Despite ultra low interest rates, banks were quite nervous. The only person buying at the moment is the Fed. The only thing the Fed wants is very high quality loans. With the new setup in these banks, things like people not paying mortgages for a few months are potential killers. The banks still have to pay on those loan packages. That delta comes out of their capital...temporarily, but that's where it lies.
By continuing to print money, the risk becomes that the Federal Reserve rate starts to become.....less relevant to the bond and mortgage markets overall. After all, if the only ones buying and accepting incredibly low return rates are central banks...and the only thing the money can be used for is extremely high grade loans....there's a chance that the correlations breaks and we see extremely high interest rates for everyone because it has to cover expensive capital charges. If you want a bank showing a ROE of 10-20%...and there's no issue of supply for the very top of the market, but everything else must hold it's own, you may end up with a very divergent debt market.
That's the other danger of continuous printing. Someplace, somewhere, there's a huge supply adjustment. Getting into that circle suddenly becomes the easiest way to make money...
Agree that massive loan defaults in Q3/Q4 could create a financial crisis. It’s one of my biggest concerns.
My fear is that the job market could remain cold into Q3/Q4. People are not paying mortgages for 3 months without penalty right now. If unemployment is still huge in Q3/Q4, people are going to default on mortgages and foreclosures will have to start. I’m not worried about derivatives of mortgage backed securities the way that they caused problems in 08/09, but this could still create big issues for the banks.
My fear is that the job market could remain cold into Q3/Q4. People are not paying mortgages for 3 months without penalty right now. If unemployment is still huge in Q3/Q4, people are going to default on mortgages and foreclosures will have to start. I’m not worried about derivatives of mortgage backed securities the way that they caused problems in 08/09, but this could still create big issues for the banks.
If the Fed buys them up they take that loss.
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