Oh wait ….

How many goodly creatures are there here! / How beauteous mankind is! / O brave new world / That hath such people in’t!

“On Thursday, the 30-year swap spread turned negative after briefly flirting with such levels earlier this month. This implies investors are somehow reckoning that they are more likely to be paid back by a private counterparty than by the government.”

My first hat tip!

Clearly this development deserves deep and thorough study.

It is difficult to draw many conclusions at this time, as Yves pointed out.

However, ONE conclusion that seems very safe is that the Taiwanese, who are large players, are stating that the outlook for the housing market in the US (which generates these cash flows supporting these structured products) is more dire than the consensus forecast.

Matt Dubuque

There’s been an update in the article, apparently the regulator was just closing off a loophole.

http://www.asianinvestor.net/article.aspx?CIaNID=87297

I am a Taiwanese, and now work in Hong Kong as a credit analyst covering banks in China, Hong Kong and Taiwan. I used be based in Taiwan covering Taiwanese banks. I can tell you the financial regulators in Taiwan are hopelessly incompetent, provincial, and wouldn’t be able to figure out the true creditworthiness of Fannie- and Freddie-backed paper. A number of taiwanese banks and insurance companies are hopelessly unprofitable and undercapitalized. The banking and insurance regulators have permited regulatory forebearance since 2002, allowing undercapitalised banks and insurance companies to regain balance sheet over time. Taiwanese insurance companies have been operating under very unfavourable conditions for years. Yields on TWD treasury securities have been below 2.5% for years, and spread on corporate bonds are less than 50 basis points. Consequently, insurance companies have been piling into USD fixed income securities, and regulators allows up to 45% of all insurance company investments abroad, which makes them vulnerable to large swings in the forex market. Well, you can imagine how well their investments have done in the past few quarters. Several insurance companies have reported large losses from the investments in CDOs, and their stock prices have fallen by between 50% and 75%. In my opinion, the regulator want to be seen to be doing something, so this is what they did.