Toxic Waste Hitting New Lows

Mortgage Backed Securities are split up into different tranches so that fund managers can choose between securities that will actually make good on their promised yield and securities that will generate a high return for a short while before blowing up. The highest rated MBSs are holding up OK these days, but the toxic waste is trading down to new lows. Besides the direction of the chart, also note the coupon yields. Suckers who bought the highest yielding junk are not getting a good enough yield for the risk they took:

AAA Coupon 0.090%
AA Coupon 0.150%
A Coupon 0.64%
BBB Coupon 2.240%
BBB- Coupon 3.890%

These are 2007-01 securities. If you took the BBB- with the extra 3.890% interest, you're already down about 40% if you Mark to Market:



Most of the AAA rated bonds don't deserve the high ratings. Underwriters play games and work with the ratings agencies to get the ratings they desire and the agencies have a big conflict of interest the encourages them to overrate bonds. AAA stuff holds up because there is far too much money being created and stored in money market accounts that has to buy something. This chart from the St. Louis Fed is very telling: