Monday, May 16, 2005

Foreign Sources Of Mortgage Capital Dry Up

There was a stunning report from the US treasury on MarketWatch. "Foreign central banks became net sellers of U.S. assets for the first time in 19 months in March, helping to slow foreign capital inflows into the United States by 46%, the Treasury Department said Monday."

"Net capital inflows fell to $45.7 billion in March from $84.1 billion in February."

But the real shocker was the decline in net purchases of US Government Agency bonds, like those that Fannie Mae issues.

From private and official sources, in $billions:
Dec '04 25.6, 1.0
Jan '05 19.9, 6.1
Feb '05 10.9, 5.2
Mar '05 6.5, 1.0

To put that in context, from all sources in 2004, foreign buyers of agency bonds purchased $226 billion. The real lenders may be calling an end to the housing bubble.

12 Comments:

At 4:02 PM, Anonymous Loren said...

I guess we'll see if the bubble actually need the foreign money or whether it was just soaking up what was available.

Regional banks, money market funds and the whole MBO/ CDO market could still keep this thing flying. Firs Fannie and Freddie puke and the debt keeps flying, now foreign money is drying up. Greenspan/ Brennake have the printing press, though. As long as people are willing to borrow it will likely be dragged out from somewhere for them.

 
At 4:15 PM, Blogger John Law said...

I think I read somewhere here that foreign money was big into RE in some areas. all manias draw in a lot of foreign capital at the end.

 
At 4:25 PM, Anonymous Anonymous said...

There was some commentary on this at Wall Street Examiner last week. Apparently FCBs (foreign central banks) buying Fannie/Freddie paper, rather than Trashuries, is a new and unexpected development.

Wonder which country's taxpayers (via their FCB) we conned into that one, and how...

 
At 4:26 PM, Anonymous Anonymous said...

With such reduced demand for those bonds, why aren't mortgage rates going up?

 
At 4:34 PM, Anonymous Anonymous said...

Fill up the ink containers in the printing presses (currency that is)!

 
At 4:37 PM, Blogger Ben Jones said...

4:25 anon,
You can see some of that in January and February. But the FCB buying dropped off in March. Fannie sells many billions in bonds every week. If this is sustained, the mortgage backed securities market will wither.

Loren,
This may be one reason why the GSE's bond production has been getting smaller; they have no buyers with deep pockets.

4:26 anon,
Short term mortgage rates are up some. I believe one reason 30 year rates are down is there is less demand for them. Also, note that the profit has been narrowing, meaning issuers are paying more and charging less. Not good for them.

John,
Those Miami condos we are going to be buying are being built with lots of latin american money. I hope they use good paint. I would hate to have to redo it. Cheers!

 
At 4:41 PM, Anonymous Anonymous said...

Since fixed rate mortgages are tied to the 10 year bond, shouldn't the reduction in the purchasing of bonds cause the 10 year bond to go up and in turn cause fixed rate mortgages to go up?

 
At 5:53 PM, Anonymous Anonymous said...

The flattening of the yield curve itself can pop the bubble.

Most new purchases in California are ARM/IO anyway. If fixed mortgages are the only option, we would not have has this nasty bubble.

 
At 5:55 PM, Blogger Frank said...

After much frustration and research, I am also convienced that buying in this currect housing market is nothing short of foolish.

 
At 6:20 PM, Anonymous fedwatch said...

(With such reduced demand for those bonds, why aren't mortgage rates going up?)

Many analysts I am reading are convinced that the Fed is "monetizing" the longer end of the curve, primarily through broker-dealers (like Goldman) and Caribbean offshore hedge funds.

I know it sounds conspiratorial, but it is a pretty likely scenario. Back in 11/02, potential Fed-Chairman-To-Be Bernanke made his famous "helicopter money" speech where he said "there won't be deflation here." In that speech, he ticked off the things the Fed could do to prevent deflation if the Fed Funds Rate went to 0%. One of those things mentioned was that the Fed could buy longer-duration bonds.

Greenspan recently called it a "conundrum" when someone asked him why the long bond was falling in yield as he kept raising the short paper. He may well know that it is no conundrum since it is the Fed itself keeping the long bond supported.

So it's the best of both worlds, for now. The Fed can raise short rates to make folks believe they are vigilant on inflation and they can monetize the long end therefore keeping the housing bubble intact and keeping the general debt environment very "accomodative."

Now that the Chinese and the Japanese are starting to cut back their purchases of t-bills, the Fed (or their private-sector financial partners) becomes the buyer of last resort. How long can this ruse continue? Pretty long, until it becomes exposed or until the inflation created by overprinting becomes too onerous.

 
At 8:07 PM, Anonymous frank said...

Ben, I just got a very interesting article from Maudlin via email on "How Japan Financed Global Reflation" by Richard Duncan.

Can I find a website.... yes, here we go:
http://www.investorsinsight.com/otb_va_print.aspx?EditionID=122

 
At 9:28 PM, Anonymous Anonymous said...

This conundrum can be good:

* 'Flippers' who rely on IO/ARM will get killed.

* Speculative bubbles will be deflated.

* Non-bubble areas will be largely unaffected.

If LIBOR, MTA, COF, and CODI continue to rise, as they have been for months, we will see very interesting results.

 

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