Don’t Bogart that Yield, Dude

Since mid-September we have noted the increase in our favorite credit market designer drug - the PIK Toggle Div Recap. The issues have continued to litter the field in Oct.

Now, a new ETN has crawled out of the sludge factory that is the "Exchange Traded" next disaster called (cleansing breath) ETRACS Monthly Pay 2x leveraged Mortgage REIT. A derivative mess offering 2x the Market Vectors Global Mortg REIT Index (hold on, gotta catch my breath) a 8x piece of toxic waste. So, with rates on the floor and run spreads on the forever lows (QE doesn't work though,,they said) the suits are offering John and Jane Q a 16 x bet. The pitch probably starts with a casual reference to famous West Coast bond royalty "buying what the Fed is buying." You can tell your grandkids you were there. Keep in mind the sub-2% pools being geared didn't even exist prior to the second decade of the new millennium. They call this a "search for yield."

We call the promulgation of these types of products (and a single digit swap spread) a return to the credit market stupidity of the glory days of the credit super cycle. One important caveat, that cycle ended in 2007. We view this garbage as two more anecdotal examples that the 30 year bull market in bonds has reached its apex.


thanks to MBS guru David Schawel and Business Insider for highlighting us to this product

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