Government Shutdown Breakdown

Vital Statistics:

	Last	Change	Percent
S&P Futures	1677.8	3.5	0.21%
Eurostoxx Index	2908.5	15.4	0.53%
Oil (WTI)	101.8	-0.6	-0.57%
LIBOR	0.246	-0.003	-1.21%
US Dollar Index (DXY)	80.02	-0.197	-0.25%
10 Year Govt Bond Yield	2.63%	0.02%
Current Coupon Ginnie Mae TBA	105.5	-0.1
Current Coupon Fannie Mae TBA	104.8	-0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.28

The government shuts down and markets are up.  Kind of says it all. Bonds and MBS are down small. The markets are sanguine because it means that QE will remain in place.

Shutdowns are not as rare as the media likes to portray: it shut down once under Ford, and HW Bush, twice under Clinton, five times under Carter, and eight times under Reagan. So keep this in mind when you hear all the sturm and drang over how this is "unprecedented" and it will wreck the economy. 

So there are two ways out that seem to be within the realm of possibility. The first (and most likely) is that John Boehner relents and allows a clean continuing resolution to the floor of the House and it is passed with moderate Democrats and Republicans. The far left will probably vote against it because they want the sequester cuts repealed and the Tea Party will obviously vote against it. The second (and less likely) is that Obama relents and throws the tea party a bone and disposes of some part of obamacare. The most likely candidate is the medical devices tax which is pretty much loathed universally and has powerful democrats lining up against it. It is unknown if this is enough to get the tea party on board. 

The government shutdown started at midnight but most people will not notice. Entitlement checks will still go out, the mail will still get delivered, and government workers are about to take a paid vacation. HUD will still operate for the most part. In mortgage land, big banks like Wells Fargo have told their clients it is business as usual. 

Here are some of the impacts on the mortgage business:

• FHA will continue insuring loans in Lender Insurance and FHA Connection will be operating. DE test cases and HUD insurance processing will be delayed
• VA - business as usual; minimal disruption
• Ginnie Mae - Will issue new securities; minimal impact on new issuer processing for at least the near future
• USDA - no guidance at the moment; expect no new guarantees during shutdown
• IRS - Apparently no 4506Ts during the shutdown

I noticed yesterday that some on the Street were backing off their FHA and VA pricing a little. The fact that things could get messed up at Ginnie Mae means mortgage bankers are wary of having too much inventory for fear they won't be able to move it.

What does this shutdown mean for the markets? Well, first of all, you aren't getting any government data until they are back at work. So no jobs report on Friday, which means the ADP employment report on Thursday will suddenly become a lot more important. A shutdown of any length will almost certainly take the possibility of reducing QE off the table at the October meeting, and possibly the December meeting. So, the longer it goes on, the more bullish it is for bonds.

That said, we will go from this crisis to the debt ceiling crisis. If the government does not get an increase in the debt ceiling, the government will have to prioritize payments. Principal and interest payments and social security payments will take precedence and will almost assuredly be paid, although some are warning that the computer systems at Treasury which pay the nation's bills will have to re-programmed to allow this intervention. Of course with the government shut down, that becomes more difficult.  

Brent Nyitray, CFA

iDirect Home Loans

Dellacamera Capital Management

1010 Washington St, 6th floor

Stamford CT 06901

T: 203-817-3614

C: 917-841-4938

bnyitray@dcm-funds.com

AIM bnyitray