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September 15th, 2008

Investors Make a “Flight to Quality”



Only a few hours into the first trading day after Wall Street lost two of its oldest financial institutions, and investors are reacting typically to a very uncertain situation. Investors are making a “flight to quality,” pulling their money out of riskier investments and parking their funds in safe, low-yield investments like Treasuries.  “This is the normal course of action,” said HSH Vice President Keith Gumbinger. “People are not investing, they’re parking their money until they know what’s happening.  It’s defensive positioning:”

Individual investors should sit on their hands right now, said Matthew McCall, president of Penn Financial Group LLC, a registered investment adviser.

“What individual investors should not do right now is panic. They should ignore the market for a few days. They shouldn’t be doing any buying,” he said. “That said, there should be some great opportunities in the next few weeks.”

Financial stocks, which were pounded Monday, should remain off limits for individual investors right now, McCall said.

“I would look at non-financial stocks that will take a hit in the broader market decline. Specifically, medical-equipment makers and biotech stocks,” he said, pointing to Johnson & Johnson as the type of stock that will take a hit as investors sell winning, liquid stocks. “However, the fundamentals will come back into play when this panic is gone, and that’s when you want to do some buying.”

What’s Happening With Mortgage Rates?

Since Friday, some downward pressure has caused mortgage rates to fall slightly. A drop in the 10-year Treasury has also led to lower pressure on rates. Until the recent events on Wall Street continue to play out, we won’t know how they will continue to affect mortgage rates.

Major Changes Ahead

The Fed has made substantial changes to how money is being made available to the market. More liquidity is coming:

The Federal Reserve Board on Sunday announced several initiatives to provide additional support to financial markets, including enhancements to its existing liquidity facilities.

The collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, PDCF collateral had been limited to investment-grade debt securities.

The collateral for the Term Securities Lending Facility (TSLF) also has been expanded; eligible collateral for Schedule 2 auctions will now include all investment-grade debt securities. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged.

Also, Schedule 2 TSLF auctions will be conducted each week; previously, Schedule 2 auctions had been conducted every two weeks. In addition, the amounts offered under Schedule 2 auctions will be increased to a total of $150 billion, from a total of $125 billion. Amounts offered in Schedule 1 auctions will remain at a total of $50 billion. Thus, the total amount offered in the TSLF program will rise to $200 billion from $175 billion.

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3 Responses to “Investors Make a “Flight to Quality””

  1. Rebecca Wilder Says: September 15th, 2008 at 5:06 pm

    Hi Tim,

    The Financial Ninja (http://benbittrolff.blogspot.com/)posted this Bloomberg article (http://bloomberg.com/apps/news?pid=20601087&sid=azabvVyocFac&refer=home):

    “Fed funds traded as high as 6 percent, or 4 percentage points above the central bank’s target rate for overnight loans between banks…The margin is the greatest since Bloomberg began tracking the data in 1998.”

    Investors are not only fleeing to quality (treasuries), but bank loans have come to a grinding hault. In my opinion, the Fed is doing everything correctly, especially injecting $70 million to get the effective rate back down to its 2% target. Good to hear that mortgage rates are still low(ish).

    By the way, you should go to the Financial Ninja website – ask him if he will put your blog on his blog roll (you obviously should do the same). His blog is really good and he gets a lot of traffic!


  2. Rebecca Wilder Says: September 15th, 2008 at 5:08 pm

    Did I say $70 million??? I meant $70 BILLION!

  3. Tim Manni Says: September 16th, 2008 at 1:37 pm

    Rebecca — Thank you as always for your intelligent insight. I have checked out Financial Ninja a few times, thanks to your sight, and I will ask to be added to his blogroll, and vice versa.

    This post (http://blog.hsh.com/?p=524)discusses how the restrictions have grown so much, it’s no longer about the availability of money for a loan, it’s whether or not you can get past the restrictions.

    It’s no doubt a rough time to be the Fed, and we can only hope they are doing all the right thing things. Only time will tell…

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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