Thursday, July 16, 2009

Bond market green shoots (2)

Here's an update of a post from about two months ago. These charts come from the folks at Markit and they track the performance of various asset-backed and mortgage-backed securities. The first chart shows the price of a representative sampling of home equity-backed securities initially rated AAA, while the second chart shows a sampling of commercial mortgage-backed securities rated AAA that were originally issued around the end of 2007, the year when CMBS issuance reached an all-time high.

Note how the prices of these securities—issued typically at a price of 100—had absolutely cratered around the same time that the stock market hit its lows in March. In the past several months these securities have experienced a significant rally, presumably because the market has sharply revised downwards its expectations of defaults. This reflects a) the return of confidence, and b) improving prospects for economic growth and incomes.

I noted back then that while these securities still reflected the expectation that default rates would be much higher than normal in both markets, they also showed significant improvement on the margin, which in turn meant that the likelihood of the economy falling down a black hole had declined dramatically, and that confidence was returning. That still looks to be the case. Confidence is returning to a lot of markets, and prices are improving.


狂猪 said...

My understanding is MBS are mark to market by banks. I wonder how much much impact this improvement will have on bank quarterly results?

Scott Grannis said...

This will have a positive impact on a lot of corporate results, not just banks. But it could be spread out over the next year or so.

Gold said...
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