Analysts split over U.S. mortgage bailout
Financial stocks may face higher risk premiums
Monday, September 8, 2008
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“We expect more of the same in the future – more bad developments, more ad hoc solutions, and – importantly – more generally negative credit conditions simmering beneath the surface,” TD says.
“From an economic perspective, it is undeniable that avoiding failure for Freddie and Fannie is a hugely positive development for the economy. But we think the market hasn’t thought about this properly. There was never even the remotest risk that Freddie and Fannie would be allowed to fail. As such, what’s new?” TD says. “We knew all along that they would continue to exist. It isn’t truly good news if it was inevitable.”
Morgan Stanley points out that the GSE turmoil has global implications, because of the large agency holdings by foreign central banks. “Our view is that most foreign central banks will likely avoid investing more in US agencies in the months ahead, but will increase their buying of US Treasuries instead,” it says. “This uncomfortable substitution is only possible because the US still commands the most liquid and deep financial markets in the world and, in times of global turmoil, the dollar is still the currency to hold, especially for emerging market central banks. Also, the fact that the world is still experiencing aggregate excess savings should help fill US financing needs. However, over the long run, we believe that the US – both the public and private sectors – will need to fundamentally reform and restructure in order to continue to attract foreign capital.”
From a Canadian bond market perspective, TD says that “it strikes us that some sympathy selloff is probably appropriate for Canadian government bonds insofar as the two economies are linked, and thus the avoidance of a U.S. disaster is good news for Canada, too. However, we believe that the Canadian selloff has been somewhat overdone relative to the U.S. – after all, this is clearly a made-in-the-USA story.”
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