Protestors are taking to the Street to let bankers know they’ve had enough. While the tattooed and dreadlocked rally in Zuccotti Park, traders are watching mortgage prices rally as Federal Reserve bond-buying buoys the basis once more. What do these rallies have in common?
· No one knows how long either will last:
The Occupy Wall Street protest is amorphous, with lots of activists—from hacker collectives to conceptual artists—thrown into the leadership mix. When will it stop? Who knows. Protestors have been quoted saying they’ll stay as long as it takes, but without clear demands, it seems perhaps only as long as the free pizza holds out.
As for the bond market rally, the Fed is reinvesting paydowns on its portfolio of roughly $1 trillion in mortgage bonds back into agency RMBS. But what exactly does that mean? Estimates put the paydown number at $262 billion over 12 months (SI, 9/23), and while additional details of the buys were doled out early this week (SI, 9/26), some analysts are still on the fence about the long-term effects in secondary market pricing. “Although the supply/demand dynamics for agency MBS have improved following the Fed’s announcement,” wrote Ajay Bajadhyaksha, head of U.S. fixed income research for Barclays Capital, in a note to clients. “We turn neutral on the basis given the considerable tightening in spreads this week and the continued risks of higher refinancings spurred by government policy.”
· Some Say The Effects Are TBD:
JPMorgan analysts led by Matt Jozoff pointed out that while previous Fed RMBS buys were concentrated in lower coupons, the scope of this bond buying round could outstrip existing supply for those assets. The means the Fed could turn to higher coupons and skew prices, particularly since the Government Sponsored Enterprises’ retained portfolios are largely concentrated in senior paper. “Any attempts to purchase low coupons this time will squeeze this sector even more,” the analysts warned.
For Occupy Wall Street, protestors don’t have a list of demands, but they’re making a splash in the countdown to 2012 elections. During Republican candidates’ debates, talk of auditing and limiting the scope of the Fed has gotten a lot of play. And Texas Gov. Rick Perry wants to try Fed Chairman Ben Bernanke for treason. Will this protest stoke banker backlash and help candidates win votes with an anti-Wall Street stance?
· Both Smell Fishy:
The Fed said just a month ago it was keeping rates near-zero until 2013 (SI, 8/9), and hinted that was all it would do. Then all of a sudden Twist went aggressive and RMBS buys were back on the table. Market participants wonder why now? But the Fed isn’t laying out substantial answers.
As for the fishy-ness of Occupy Wall Street … well, let’s just say Zuccotti Park isn’t known for its sanitation facilities.