Morning Report: Just how risky is the financial system right now?

Vital Statistics:

	Last	Change
S&P Futures	2434.5	2.5
Eurostoxx Index	389.4	0.2
Oil (WTI)	45.5	-0.3
US dollar index	88.2	0.2
10 Year Govt Bond Yield	2.19%
Current Coupon Fannie Mae TBA	103.47
Current Coupon Ginnie Mae TBA	104.33
30 Year Fixed Rate Mortgage	3.92

Stocks are up small after the ECB decision. Bonds and MBS are down.

James Comey testifies today at 12:30 pm EST. Here are his prepared remarks. Punch line: Nobody looks good in this situation, but nothing impeachable. There is a small chance that something could come out in questioning, but this should be a non market-moving event. 

Initial Jobless Claims fell to 245k last week. Jobless claims are hovering around lows not seen for 45 years. 

Bill Gross sees the bond market as fraught with risk - the worst since 2008 - but he says he feels required to stay invested. His concern is not necessarily risk within the financial system, but simply the prices people are willing to pay for risk. As he says, people are not buying low and selling high - they are buying high and crossing their fingers. His view is that central banks are behind this mindset, which has been a common objection for decades (remember the "Greenspan put?"). That said, the Fed is systematically removing that support, which should help risky asset prices normalize. Any sort of pullback in asset prices will inevitably be Treasury bullish, which means lower mortgage rates.

Meanwhile, Paul Singer of Elliott fame is very concerned about the current state of the market. He notes that the leverage in the system is higher than 2008. Yes, that is true, however the assets being leveraged today are much higher quality than they were a decade ago. Think of it this way: You borrow 95 cents on the dollar to buy a Treasury bond. Yes, you are leveraged, but the asset you hold is pretty low risk. Can you lose 5% on that asset? Maybe, but you probably won't. In 2008, people were borrowing 90 cents on the dollar to buy MBS backed by no-doc pick-a-pay loans. Can you lose more than 10% on that asset? Easily. Which is a more risky trade? Yes, the leverage today is higher (95 cents on the dollar versus 90 cents on the dollar), however the underlying assets being leveraged are much safer. Note that Paul is a bit of a perma-bear who has hated the stock market since 1982. 

Case in point: Over 9 million borrowers have regained equity in their homes since the 2008 crisis. Negative equity fell to 3.1 million homes, or about 6% of mortgaged properties. The biggest markets with negative equity? Miami, Las Vegas, and Chicago. 

Higher home prices have begun to temper homebuyer bullishness, according to Fannie Mae's Homebuyer Sentiment Index. The net number of people who believe now is a good time to buy fell 8 percentage points to a record low, while the number of people who believe now is a good time to sell hit a record as well. 

The House is looking to reform the National Flood Insurance Program, which is heavily subsidized and currently running a $25 billion deficit. Reforming it will be tough without imposing sticker shock on many homeowners.