Mining our data to soothe contagion fears

Contagion. It’s a word which triggers fear in our daily lives and financial markets. Recently, it’s been used around Chinese property developer Evergrande Group, as angst around its potential collapse makes it harder for the sector to raise new funds or refinance.

Our evaluations data shows evidence of a potential ripple effect for Evergrande’s peers, a dynamic that’s helped push China’s credit default risk to a year-to-date high. But while Chinese high yield bond valuations are in a sharp downturn, our data also indicates a stark divergence compared to high yield bond valuations for the rest of the world. For now, this may soothe worries around contagion risk to U.S. investors’ credit portfolios.

Speaking of the property market, it’s one that’s operated on surprisingly scant hard data. For a data nerd like myself, it’s incredible that such a huge sector (worth over $US36 trillion) relies on methodologies that are often survey-based. As exuberance from the U.S. housing boom continues, we’re using data from ICE Mortgage Technology - which processes nearly half of all U.S. residential mortgages - to offer indices calculated from loan applications. This means traders, lenders and investors can access timely, data-derived information for forecasting, prepayment modeling and risk hedging.

For example, our indices show that despite a selloff in bond yields, the spread between U.S. Treasury rates and 30yr Mortgage rates has tightened noticeably since early August, dampening the negative impact to residential home loan borrowers. Refinancing rates extended by underwriters tend to differ depending on if there is a cash-out element or not, and the gap between the two can be viewed as an indicator of credit conditions. So far in 2021, our data indicates that relationship has not changed materially. The interest rate differential for home borrowers with the lowest and highest credit scores has also remained fairly stable over the past year - in other words, we see no evidence of a drastic risk repricing, as we did post global financial crisis. For MBS market participants, this kind of transparency can boost confidence in decision making and ultimately, feed greater liquidity.?

Stay well,

Lynn