FLASH UPDATE: Treasuries and MBS markets both little changed ahead of possible government shutdown

The Treasury market is essentially unchanged on the day as markets take a wait and see attitude on the possible government shutdown.  MBS are trading within a tight range with discounts up slightly (1+ tick) on a hedged basis and premiums off slightly (1+ tick) on a hedged basis.  Expect Treasury markets to rally significantly if the government does shut down and mortgage discounts to continue to outperform premiums (…but in a much stronger way). 

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

MBA Mortgage Applications (from 9/18/13)

TRADEX GLOBAL INTERNAL COMMENTARY

Mortgage applications for both refinancing and purchases posted a “relief rally” last week.  The Index in the prior week had reached its lowest level since November 2008.  In particular, the refinance portion of the Index jumped 17.9%, albeit from the prior week lows that had not been seen since 2009.  This activity reflects mortgage rates having eased last week to 4.75% from 4.80% the prior week. 

Looking slightly longer term, mortgage rates have soared by more than 1% since May 2013, slowing the greatest refinancing wave in history to a crawl.

We believe it is the rising rates that has both new and existing home buyers trying to get a deal done, especially in light of any short-term pullback in rates where we ultimately expect higher rates.  The refinance sector is very key for our IO strategy in the Liquid Real Estate Portfolio.  We are of the belief that there are still some premium mortgagors who will do a refi, but that most pools will show ‘burnout” (defined as the borrowers who could refinance have already done so, and the others will not) and the “carry” will increase on those IO securities.

Furthermore, we believe that running both an RMBS and CMBS credit strategy that has done well as fundamentals in both housing and commercial real estate improve is a more balanced approach than relying on only one strategy.  For example, agency IOs have been a slight drag on performance this year, while non-agency MBS has done extremely well.

The Tradex Global Liquid Real Estate Portfolio has had a strong 3+ year track record and we believe going forward the opportunities are great. We invite interested investors to discuss this Portfolio with the Team.  Keep nimble. 

  

EXTERNAL RESEARCH COMMENTARY

Applications for U.S. home loans edged up in the most recent week, off their nearly five-year lows, as interest rates eased from a 2013 high, data from an industry group showed on Wednesday. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, rose 11.2 percent in the week ended Sept. 13. That follows a 13.5 percent slump last week that took the index to its lowest since November 2008, in the thick of the financial crisis. The data come the same day as U.S. Federal Reserve policymakers meet to consider slowing a massive bond-buying program, which includes purchases of mortgage-backed securities. The Fed will issue a statement announcing its decision at 2 p.m. EDT (1800 GMT). The Fed's stimulus program, known as quantitative easing or QE3, has been a major boost for U.S. home prices, and many economists worry that policymakers might withdraw their aid too soon, dealing a blow to the housing recovery. Borrowing costs have soared by more than a percentage point since late May on views the Fed will soon slow its $85 billion per month in buying of MBS and Treasuries. MBA data showed 30-year mortgage rates eased 5 basis points to 4.75 percent, after last week matching the 4.8 percent high for 2013. The refinancing index jumped 17.9 percent to 1,801.7 after a plunge last week brought the index to its lowest since June 2009. The mortgage survey covers over 75 percent of U.S. retail residential mortgage applications, according to MBA.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

Flash Update - Liquid Real Estate Portfolio

No Taper Spells a Rally in the Treasury Market and an Even Stronger Rally in MBS

The Fed declined to taper at all today, sending Treasury securities more than a point higher in price at the longer end of the maturity spectrum (7 years+).  The markets had been expecting a $10-$15bln taper, either equally weighted between MBS and Treasuries or perhaps more strongly weighted in Treasury securities.  After lagging the Treasury rally for about 10 minutes, mortgages soon picked up on the rally and eventually tightened nearly a quarter to a half point more in price on a hedged basis than Treasuries.

The rally in Treasuries is an example of a  “Bull Steepener”, in the sense that intermediate maturities fell faster in yield than longer maturities - perhaps reflecting that investors believe this delay in taper is not a long lived phenomenon, at least as far as the Treasury market is concerned.  However, in MBS, the tightening was more pronounced in longer dated discount MBS – again perhaps reflecting that investors believe future tapering will be more focused on Treasuries than in MBS.  To the extent future tapering is focused on Treasuries versus MBS (as we and others expect), it will continue to bode well for the MBS market.

All-in-all, it was a very strong day of performance in fixed income markets, especially MBS securities.  In terms of our Liquid Real Estate Portfolio, it’s important for investors to understand the Fed’s commitment to a more gradual tapering of its Treasury and MBS purchases will bode well for our mortgage strategies contained therein.  While fundamentals continue to improve in the RMBS and CMBS markets, and rates inevitably will rise, it will allow the positive carry of its holdings to continue to accrue and home prices to remain well supported.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

Flash Update - Short-Biased High Yield Portfolio

Historical Relationship between HY Returns and Treasury Yields is Breaking Down 

Currently the historical relationship between interest rates and returns achievable in the High Yield market is breaking down.  Traditionally, higher interest rates is a result of stronger underlying economic activity.  In the current market environment, higher rates is a result of the expected removal of exogenous Fed accommodation.    

Historically, higher interest rates foretold strong growth and higher rates of return in the High Yield market.  Today, higher rates are expected to result in a drag on consumer activity and a more challenging environment for marginal and highly levered corporate issuers.  Almost immediately after May 22^nd when Bernanke acknowledged that QE accommodation may slacken in the 2^nd half of 2013, high yield investors began to adjust their expectations.  Institutional investors immediately started looking at high yield as an asset class facing a challenging outlook as rates rise rather than facing an accommodative outlook as rates rise. 

The graph above shows how the historical correlations between higher 2-Year Treasury rates and returns in the High Yield market has flipped from POSITIVE to NEGATIVE in early June 2013.  This is the first time that this has occurred in any significant way since prior to the Great Recession in 2008.  

Tradex has found a tremendous amount of catalyst-driven, fundamentally weak, high yield credits that together have created a tremendous opportunity to be short.  This time around, as interest rates rise, these HY companies will likely start to crack.  Tradex is focused on developing absolute return strategies that can take advantage of rising rate environments.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

Several Skills Important When Shorting - Featuring Richard Travia

Several Skills Important When Shorting - Featuring Richard Travia

Hedge Funds use Specific Criteria for Prime Broker Selection

Prime Broker Selection - Featuring Richard Travia

Flash Update - Short-Biased High Yield Portfolio

Cracks in High Yield Companies Show Up Early  

Yesterday we tweeted about Kodak emerging from Bankruptcy.  Kodak was founded in 1880, at its peak employed more than 60,000 employees and filed for bankruptcy in January 2012.  So, was bankruptcy the catalyst for this storied American bellwether's bond and equity prices to plummet?  No, it was not...In early 2011, Kodak unsecured bonds traded at PAR.  It was already an older-line, dead or dying business that had significant competitive headwinds...It already had YEARS-long delays in embracing digital camera technology...It already was being weighed down by high pension costs...It had already expanded its adviser's duties to explore bankruptcy, among other options, and drew down on a $160 m credit line...It wasn't until September 30, 2011 when Kodak publicly confirmed hiring restructuring lawyers that the equity fell below $1/share.  The unsecured bonds fell to the 10-20 range, and the equity eventually went to zero.  Kodak is merely an example of the dying businesses we focus on that have weak fundamentals, are not macro-timing oriented, and have multiple catalysts to drive bond prices lower.

We have found a tremendous amount of catalyst-driven, fundamentally weak, high yield credits that together have created a tremendous opportunity to be short.  

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global