Agency MBS Hammered - PIMCO Begging For Another Bailout

It seems like only yesterday Fannie and Freddie failed and they were taken over…actually it almost was.  Everyone cheered for days how helpful this would be for mortgage bonds and mortgage rates alike. Speculation abound that this was the needed ‘fix’ for the housing market. Of the largest voices was PIMCO.  Well, it may have lasted a couple of days but now things have fallen apart again much like I speculated may happen a few weeks back in a previous post.

Now PIMCO is back at it. A few weeks ago Paul McCulley and Bill Gross were heavy on the media circuit threatening Treasury to rescue Fannie and Freddie and their sub and senior debt or ‘ they and their investors’ would boycott buying any US debt.  After the bailout, they gloated for a week over how much money they made off the US tax payer.  Just two weeks later the tables have turned and they are getting creamed.

Are Agency MBS holdings now being ‘marked by matrix’ or some other hypothetical means?

The reverting of Agency-Treasury spreads to pre-bailout levels exposes another dirty secret on The Street. There are so many sellers of agencies on the Street that dealers, no doubt under executive management direction have dropped bids and expanded bid offer spreads.

The media and quote services are showing unrealistic prices. A week ago we sold FHLB 2-year notes for an an account we manage at 99.925, the best bid we could find. Bloomberg quoted them at 100.54. How many funds and banks are marking their agencies at quote or matrix prices instead of transaction prices?

People are aware that hedge funds, banks and brokers unrealistically marked derivatives and other crappy paper. But most of the known universe is unaware that agency holdings might be unrealistically marked now because few people want to warehouse agencies these days.

Not only did PIMCO take a major hit due to Lehman and likely AIG but GSE spreads are back at wider levels than before the GSE bailout and mortgage rates are up.  Now, Paul McCulley is out there again this morning on CNBC begging Hank Paulson to ’show his wallet’. He specifically said that Hank Paulson has to get out there and ‘buy GSE securities’. The following is the link to this morning’s CNBC segment.

Agency Spreads Widen Dramatically

Agency spreads have widened rather dramatically versus benchmark Treasury debt as fear grips even a market which, for all intents and purposes, carries the same risk as Treasury debt. The 2 year agency sector has widened 16 basis points versus benchmark Treasury paper. In the 5 year sector paper is wider by 10 basis points and in the 10 year sector bonds have cheapened by 8 basis points.The flight to quality trade which has engulfed the markets has also contributed to the widening spread basis in this sector.

Repo issues also impact demand as well as traders’ ability to carry agency paper. As I have noted earlier today, Treasury repo was anywhere from zero to fifty basis points today. Agency repo was around 2 ½ percent. If you fund your long at 2 ½ percent and reverse your short in at zero, you will soon be applying for a bridge loan from the Fed.

In general, balance sheet space is sparse and traders cannot hold positions. Six-month agencies appear very cheap. Discount notes trade around 2.60 percent. Six-month T bills trade around 1.05.

One trader also noted that the recent spike in volatility has made callable paper cheap. (When one buys a callable bond you are selling an option to the issuer. Consequently, expensive vol works to the advantage of the buyer of the bond.)

PIMCO was reckless and bet the farm early on distressed mortgage debt. Now, they have turned into a bunch of whiners spending all their free time using the media as a platform to threaten the regulators into making them whole at the taxpayers’ expense.

We see this all of the time but nobody has been more vocal and sounds more desperate than PIMCO in recent weeks.  You saw what happened yesterday to the dollar/gold due to the US Gov’t printing more money. They want even more money now at our expense. Hey, it’s their job, I get it. But there has to be a point where throwing your brother under the bus to save your wallet becomes viewed as anti-American and not capitalistic.

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