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Daily Market Commentary

The news is in the earnings this morning.  Specifically UBS and Fannie Mae, both reeling from the mortgage mess in the US, have sent Treasury prices higher this morning.  The volatile two year note is now trading at 2.34% after recently hitting 2.50%.  So once again we are seeing government bonds rise while corporate issues fall.  This is a reminder that the baseline problems of home prices in the US are not over.  It also brings us one step closer to finding out whether this "Government Sponsored Entity" is more government or more private - a question we REALLY don't want to know the answer to.

BlackRock Inc, quickly becoming the king vulture of the sub-prime mess, is in talks to buy $15 billion of UBS's subprime assets (ed. note - who decided it was worth $15 billion?).  BlackRock, whose shares are up around 40% since the credit crunch began last August, is becoming the go-to manager for distressed debt.  Their plan is to hold onto the debt until the market recovers and then sell it at "normalized" market rates.  With mortgage defaults rising fast, there is still a lot of risk in these assets... of course we don't know where they are currently valuing these bonds.  The only thing this asset class has going for it is that zero new supply is on the horizon.  The US lenders have virtually turned off the taps, having tightened their lending standards so much, that even the best bets are being turned down for loans and mortgages.

Recall BlackRock was chosen by the Fed to manage $30 billion in Bear Stearns' unmarketable assets.  The deal with UBS would see them earn a fee for managing the book, and a percentage of the profits after a certain return threshold is met.  Since their own capital is on the line, there would be downside risk as well.

Canadian Building Permits fell off a cliff in March, dropping 4.5%.  So far we've only seen evidence of Canadian house and real estate prices slowing, not all out contraction like our southern neighbour.  However, we will be watching closely - the anecdotal evidence (the 2 houses around the corner from me that have been on the market for 3 months) certainly suggest a cooling.

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