Of MBS and Automotive

Soleil's Carol Berger wondered aloud in a piece last week what would happen when the Fed stops buying mortgage-backed securities in 2010. She fears that without that deep-pocketed bidder, there will be no other natural buyer and mortgage rates could go up enough to hurt the housing market. Seeing as how we are partners, I figured part of my job would be to help find that reassurance she is looking for. I noticed a few pieces in the paper, oddly enough, that addressed the same subject.

Michael Mackenzie, writing in Saturday's Financial Times, said, "There is the prospect for increased competition for ... debt sales once the Fed completes its mortgage purchases at the end of the month. Throw in the prospect of companies and banks having hefty amounts of debt maturing in the coming years and it's safe to think the clearing price will result in higher interest rates".

Not to be outdone over the weekend, in an article in Saturday's Wall Street Journal, Peter Eavis headlined his story, "Ben Bernanke May Be Boxed In". He says, "mortgage-backed securities issued by Fannie Mae and Freddie Mac, the focus of the Fed's asset purchases, now have yields that are only slightly higher than Treasury yields. With only four months to go before the Fed is scheduled to end its purchases, it seems few investors ... fear the Central Bank's exit. But a real risk remains ... securities purchases are scheduled to end well before any sizable drop in unemployment. And because those purchases have added to the monetary bang of low rates, stopping them could mean an effective tightening sooner than expected."

"Few investors ... fear the Central Bank's exit." That could mean that some investors are right and rates won't go up. Borrowing from work done by Soleil's Chief Economic Advisor, Lyle Gramley, gives food for thought. Not addressing this particular topic, Lyle noted that spreads between conforming mortgages and the ten-year Treasury bond peaked in December 2008 at 290 basis points. In December, the Fed said it was going to buy mortgage-backeds (and other paper) and the spread went to 250 basis points in January of 2009, 230 in February and 220 in March. In March, the Fed again came down from the mountain and said it would buy a total of $1.25 trillion, giving size and oomph to the program (there are about $4 trillion in mortgage-related securities lying about). Spreads went to 150 basis points, which is roughly where they are now. The market knows the Fed is exiting and spreads are where they are and the 30-year mortgage is below 5% as well. Time will tell, as it always does, but it does appear a clash of views is developing.

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At the time of publication, Farrell held no position in the stocks mentioned.

Vincent Farrell Jr. is chief investment officer for Soleil Securities Group and a regular guest on CNBC and other national print and broadcast media.

Prior to joining Soleil in August 2008, Farrell was a principal of Scotsman Capital Management. Before that, he was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.