Morning Report - Mel Watt doesn't get the vote

Vital Statistics:

	Last	Change	Percent
S&P Futures	1755.0	4.0	0.23%
Eurostoxx Index	3062.3	-5.7	-0.18%
Oil (WTI)	95.64	-0.7	-0.77%
LIBOR	0.238	-0.004	-1.76%
US Dollar Index (DXY)	80.53	0.338	0.42%
10 Year Govt Bond Yield	2.58%	0.02%
Current Coupon Ginnie Mae TBA	106.2	-0.2
Current Coupon Fannie Mae TBA	105.2	-0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.15

Markets are up this morning on no real news. The Markit PMI fell in October, but came in a little better than consensus. Bonds continue their post-FOMC sell-off with the 10 year yielding 2.58%. MBS are down a few ticks.

Mel Watt failed to garner the 60 votes needed to move to a final vote, so he will probably end up withdrawing his name for consideration to run FHFA. Watt was considered to be a little too political and there were grave doubts he would be working in the best interests of the taxpayers. Moody's Chief Economist Mark Zandi has been mentioned as a possible nomination, however he has been a vocal proponent of principal forgiveness and that will be an issue.

The thing to keep in mind about principal reduction is that there are two losers in this situation - the taxpayer who obviously backstops the insurance and the investors who own the paper. The investors who own these mortgage backed securities are mainly pension funds, and they have been quietly urging their representatives in Washington to not go the mass forgiveness route. Think about things from a pension fund's perspective - the expected rate of inflation for their liabilities has been growing a lot faster than the paltry rate of return they are getting on their assets in this QE-manipulated environment. The dirty little secret of many of these funds is that they are making, shall we say, optimistic assumptions about the expected rate of return on their asset in order to claim they are in fact solvent. Capital losses (even on insured MBS) will happen, which will push them even deeper in the hole. Many of these plans are government / union and many politicians have their own retirement in these plans. So that is a look at the behind-the-scenes issue with the whole FHFA head. 

Politically, Acting Chairman Ed DeMarco may in fact make a convenient target for the Left, who can rail against his refusal to entertain principal mods while that the same time offering assurances to their state pension funds that nothing will change. And the Republicans get to do the dirty work. A win all around. 

One note, CBO did conduct a study that showed that a mass principal forgiveness program would save the government money, primarily through increased economic growth, however that result depends on the government getting it right in terms of crafting a policy that would not cause a wave of strategic defaults. That is the $10,000 question.

John McCain and Lindsey Graham are going to hold up the nomination of Janet Yellen unless they get more details from the Administration over the Benghazi attacks. In spite of this, Yellen will get confirmed. I don't anticipate the political sausage-making will affect the bond market at all.