Waiting for Dust to Clear

The billions-trillions in mortgages in fixed income portfolios are being hedged for changes in their duration caused by the up move in US 10 year Treasury rates. This feeds on itself until they are all hedged. A similar move the other way caused those massive spikes down in Treasury rates to under 4% a few years ago. [That's when I refinanced our house at 5.41% for 30 years - since they are giving away cheap money, I took the FNMA maximum :-))) We're never going to prepay that one :-))) ]

Mortgages are priced off prepayment models. When interest rates rise homeowners do not refinance or move as much. So the duration of the mortgage securities increases a lot. If the mortgages are at a discount [many older mortgages are at a discount now]. This causes a DOUBLE hit - their price falls due to BOTH the rise in interest rates AND due to the rising duration. To maintain a constant duration AND hedge the price moves, which is necessary to match liabilities, the mortgage portfolio manager must short some Treasuries with longer maturities than the average life of the mortgages [which are often about a 5 year average life in the common prepayment models]. The housing problems are also probably causing increase duration in mortgages as many homeowners can't move since they can't afford a mortgage on a new house, or won't sell their house at a loss.

That's a long explanation of what's going on. It just takes some time to settle out. I'll try to make a profitable light-side stock futures trade once in awhile.

The real economy is fine & the current disinflation and moderate growth trajectory is extremely bullish long term.

By the way, remember part of my "Time Diversification" post about how hard it can be to buy a pullback when it occurs? It's pretty tough now, I expect. If I had uninvested cash, I'd wait until the Friday CPI and triple-witching number to put a chunk to work. Of course I bought at the all-time high the day before this "correction" began. The future is tough to predict short-term. No regrets. That was the third chunk in my time diversification investment move. Both prior chunks were at much lower prices than even now.

PS: The dollar strength is pushing gold down. Hmmm. strong economy, more global inflation is what I've been hearing. So why is gold going dow? These "explanations" are crap - we are just seeing beefers flaying around, dumping old positions & looking for new ideas. Like my "elephants at a drying water hole" metaphor. Don't get stomped. Wait for a new trend. I'm waiting to buy gold & silver, perhaps before the fall seasonal strength.

PPS: Grrr. The computer with my email & eSignal got a blue screen of death. Twice. Haven't seen that before. And I've changed NOTHING for weeks. So it's got to be some automatic update of some software. Grrr. I hate PCs. Why don't I switch all to Macs? Thinking. How can they get away with treating customers this way? It's spelled, m-o-n-o-p-o-l-y.

P^3S: The initial move that started this interest rate increase was the capitulation of the recession-mongers in bonds [such as Bill Gross]. Once the 5% level was approached, I think the hedging accelerated the move.

P^4S: I think that there are "real" buyers for the 30 year US Treasury bond over 5% and more over 5.25%. In bonds, "real" buyers are the pension funds: state, municipal & corporate funds. They can lock in good yields to match very long liabilities at those levels & will do it. Once they buy & match, they don't sell, hence are very "real" buyers.