Credit Loosens But Remains Tight In The Mortgage Market



Credit conditions ease, but mortgage credit is tight

In the FOMC review of the financial situation, the Fed discusses the state of the credit markets and the interbank market. The Fed gets rough data on Treasury trading from primary dealers through its Desk Survey.

Primary dealers trade Treasuries in the primary market. This means that they trade directly with the Fed. This is a lucrative business.

The Fed noted weakness in overseas markets and that this pushed long-term interest rates lower. It also noted increased volatility in the Treasury markets—in fact, noting “capitulation day,” when the yield on the ten-year dropped 30 basis points intraday before giving back those gains.

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The yield on the ten-year decreased by about 30 basis points, which the Fed attributed to global economic weakness. Yields on Treasury inflation-protected securities (or TIPS) also fell during the inter-meeting period, reflecting a stronger dollar and weaker oil prices.


On the household front, the Fed noted that the mortgage market remains tight. However, signs of easing are starting to pop up as home price appreciation continues. Credit spreads in the mortgage market tightened, but applications are way down. Former Federal Reserve Chairman Ben Bernanke said even he was having difficulty refinancing his mortgage. While the Fed didn’t mention it, regulatory risk remains the biggest impediment to credit expansion in the mortgage space.

In the consumer market, conditions were strong. Credit card balances increased, auto loans picked up, and issuance of credit card–backed and auto-backed securities was strong.

Conditions for commercial real estate loans improved during the quarter. Also, gross issuance of investment- and speculative-grade debt was fast.

So, the credit markets are functioning well. Corporations and households are able to access the credit markets. Increased credit availability is extremely important for commercial real estate investment trusts (or REITs) like Simon Property Group (SPG), Boston Properties (BXP), Kilroy (KRC), Vornado (VNO), and SL Green (SLG).

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