Calculated Risk: Fannie Mortgage Bond Spreads Decline

Well, we have payroll services firm ADP saying that job cuts in October totaled 157,000, above the 100,000 predicted, with September numbers up too, and Challenger, Gray & Christmas, the grim reapers of the corporate world reporting that more firms are planning to cut jobs.

Meanwhile the ISM’s non-manufacturing index, an index of the service economy, fell to 44.4 the worst number recorded since the index was created in 1997.

It’s not just the US either. U.K. factory output is dropping like a stone.

In the credit crunch, while gross interest are improving, the spreads between these interest rates and treasury notes remain high.

For example, the LIBOR rate has fallen to 2.51% from 4.82% on 10/10, but the spread remains 151 basis points (1.51%) over the Fed’s target rate

Prior to the credit crunch it averaged 22 basis points.

This may be mortgage applications are down, banks are still skittish, and costs are higher.

This is a normal response by banks when you consider that you have things like the bath that Glitnir swap sellers took. They look to being left with 3¢ on the dollar.

The swaps in question are a sort of bond insurance, so it’s no surprise that the two largest, monoliners Ambac and MBIA just posted big losses.

It appears that there are expectations of more rate cuts, as the dollar is down, though paradoxically, so is crude oil….Normally, they tend to move in opposite directions.