Thursday, February 19, 2009

The credit markets continue to sag as the weight of additional forthcoming government debt supply continues to mount. Yesterday the White House pledged up to $275 billion to help stem another wave of home foreclosures. This new round of debt comes on top of the $787 billion economic stimulus plan that was signed into law on Tuesday.

Debt that generates a meaningful return is one thing - while borrowing efforts that send capital to the same place that a sock goes in the dryer is a completely different financial concept. Global investors are keenly aware of data from the Office of the Comptroller of the Currency shows that more than 53% of loans that were modified in the first-quarter of 2008 went into default again within six months. Nearly 36% of those modified loans went bad within just three months. And on top of all of that -- this loan performance was registered when the economy was in better shape than it is today - with employment at a considerably higher level.

As Reuter's News columnist James Saft points out it is certainly possible that those earlier loan modifications were granted to the wrong people under the wrong circumstances and the new plan will address and resolve all of that - but judging by current price action in this morning's debt markets - most investors remain very skeptical of this new housing initiative from the government. Let's keep our fingers crossed that traders are simply proving to be too pessimistic with respect to the Housing Recovery & Reinvestment Act. It would add insult to injury if it turns out governmental efforts to speed recovery in the housing sector for up to 9 million homeowners -- wound up delaying the recovery by months (if not years) while simultaneously contributing to higher mortgage interest rates for everybody.

Mortgage investors were unpleasantly surprised by a report on the level of inflation at the producer level delivered by the Labor Department this morning. The headline January producer price index rose 0.8% as a slowdown in auto production pushed prices higher. Makers of pharmaceuticals and communication equipment pushed through price increases during the first month of the year even as sales slumped. Excluding the more volatile food and energy components, the so-called core rate of producer inflation rose 0.4%, also more than anticipated. These producer price increases may not stick since the this morning's initial jobless claims report for the week ended February 12th confirmed the employment sector is performing at its worst levels since 1964.