Mortgage markets Essay Example | Topics and Well Written Essays - 1000 words

Mortgage markets - Essay Example In general the beliefs of the people on the mortgage bonds may affected by the interest rate shock. The interest rate shock can be absorbed when the bonds are backed by Government. The size of the GSE mortgage portfolios coupled with discipline in the market helped by interconnectivity of the international financial institutions, led to the possibility of a result that is not precedent. These bonds can become liquid when the firms unwind their positions due to losses. The other firms loss will create liquidity in the illiquid GSEs. The trends that affect the mortgage market is the losses and gains in the international markets as they are interconnected.The danger of long term investment that rely on the presumption of liquidity are important for transparency. These help in disclosure also. The complexity is considered as enemy of stability in case of mortgage bonds. The confidence in hedging strategies may lead to complacency and produces the opposite effect in the absence of liquidi ty. Yet times it is considered that the complexity also helps in stability of mortgage bonds and capital markets. The paper focuses on the trends of the market and the complexity that can result in stability. The mortgage bonds would be more stable when the financial markets and the guarantee of liquidity depend on the risk management also. As a single firm is considered it can be termed as complex. There will be a division of labor in the case of interest rate risk management. The portfolios can be comprised with fixed rate mortgages as loans or mortgage backed securities. 2. Trends in Financial markets The markets of major equity have resumed growth in 2006 as regaining levels reached before May June correction. This trend is due to the healthy corporate balance sheets and robust earnings growth. The low default rates and investor sentiment has remained positive. These are capable of increasing tension in the markets due to the turbulence and somewhat increased levels of historical and implied volatility. Name Value Change 100 6,649.3 -15.2 250 11,797.5 -39.7 techMk 1,601.8 -1.4 All Sh 3,435.1 -18.8 Sm Cap 4,095.5 -14.5 The above statistical chart is obtained from http://www.moneyweek.com/file/14905/how-us-mortgage-debt-could-cause-a-global-financial-crisis.html The central banks of different countries have withdrawn liquidity and short term interest rates are raised. These have not been matched at the long end. In case of mortgage bond markets regarding corporate organizations the past turbulence may spread to the 2007 or declined. These spreads have a chance of spreading in 2007 and these should be maintained at low levels. The major corrections in the equity markets internationally spread fears of increasing inflation in the concerned countries. As the higher interest rates decreased growth and increased inflation all over the globe, this can be termed as turbulence or liquidity in the mortgage or bond markets. In 2006 some major markets dropped back to levels of 2005 and implied losses. Though there are losses the steep gains in the previous market neutralized the present ones. These results are recorded in Japan or in Euro area. In the second half of 2006 the euro area broad market index fell back to January 2006 levels. In the same per iod the broad market index of US is slightly less than 9 percent. After that the volatility of major indices increased and continued to rise. This is in spite of regaining in the markets. The volatility decreased after July and remained at previous correction levels. This indicates the increased uncertainty on the part of investors. As all the major indices have remained below the stock market volatility, the forward looking measure can corroborate the view