When Markets Break

How do you know that markets are broken? Sometimes it's the presence of a clean arbitrage like that in Thomson Reuters shares. But there's a much bigger weirdness going on right now: as John Carney reports, the spread on long-dated agency debt hit 215bp yesterday. Which is roughly the same as the spread on Tunisian bonds, and is actually wider than where Panama is trading. And that's after Hank Paulson came out and made explicit what everybody knew to be the case all along -- that there's no conceivable way that the US government is going to allow the agencies to default on their senior debt.

On the other hand, sometimes you know the markets are broken because Fortress (FIG) has bought a 16 billion of your lovingly-crafted triple-A CDO tranches at between 10 and 12 cents on the dollar.

 

 

Comments

[Jimmy Lathrop:]

Now I know what they mean about the bankers having a bunker mentality! Thanks for giving me a big laugh on a slow Friday, Felix.

2008 Aug 15 11:25 AM

[MarkMedayski:]

There are hundreds of reasons why market is broken but the biggest of it all is America's capitalism that is build on risk,greed,lies,conspi... attacs,theft just to name a few.
Please don't forget :
DOW JONES 30 that everybody loves so much and all business networks speak every day how cheap it is,WILL CRASH VERY SOON and John Q. Public will left with bankruptcy and without work and your polititians don't care about it as crash is made to enrich a few of the elite,but not you.
Keep away from stocks,don't buy Dow Jones,SP500,Nasdaq it's all junk.
December 09
Dow Jones below 9000 at most super bullish case otherwise at 7000-8000 points.TAKE YOUR MONEY AND RUN LIKE CRAZY!

2008 Aug 15 11:42 AM

[NC Trader:]

Felix,
I love your articles. Keep the video's coming, that was hilarious.

2008 Aug 15 11:44 AM

[jswede:]

this is just wrong.

Felix is comparing agency/gov't mortgage PASS-THROUGH security spreads to fixed term debentures of Tunisia and Panama.

Pass-throughs trade much wider because the investor takes on pre-payment risk of principal. The investor sells call options to the issuer for basis points in spread.

"Long-dated", 30yr, FNMA debt (debentures - the apple-to-apple comparison) trade at around 5.20% today. That's a spread of about 72 basis points over the 30yr UST.

No real story here. MBS is cheap, but it's not emerging market cheap.

2008 Aug 15 12:26 PM