No Rest for the Weary

Mortgage bond prices opened higher Friday morning adding to the gains seen Thursday afternoon. Rates are finding support from weak stocks. Equity markets in Europe and Asia are lower and the selling pressure appears to be spilling over into the US markets. At the bond market opening Dow futures were lower by 51-points. In news released this morning, the trade deficit stood at $50.1B. Analysts were expecting a deficit of $49.7B. That data has little effect on trade. With no more data set for release today traders are waiting for stocks to begin trade at 9:30 am ET. No rest for the weary. It is going to a busy weekend in Euro Land. Saturday morning senior euro zone officials and European Union finance ministers will discuss how to provide support to Spain. A euro zone official described the situation in Spain as “quite bad”. The IMF and two outside companies are scrutinizing data from Spain in an attempt to find out how deep the hole really is. It is unclear how officials plan to provide the aid and how much is needed. Spanish banks have a similar issue faced here in the US. In the boom times mortgages were easy to obtain and housing prices were escalating quickly. We know how that ended. As the amount of foreclosures grow, housing prices come under pressure which effects the value of the loans (both performing and non-performing) held by the banks. As the value of the loans (an asset) falls, capital ratios are reduced requiring the banks to raise money. To raise money banks sell holdings of high grade performing loans, which have the most value. This is another one of those vicious cycles.