If the Federal Reserve Open Market Committee is truly in the "eighth inning of a tightening cycle," with a ninth inning approaching in June, mortgage loan default risk is substantially diminished, according to a Merrill Lynch report. This also bodes well for structured finance CDO performance.
"In our worst case scenario, even moderately higher rates and near-flat home price growth, on their own, are unlikely to cause losses in the typical mezzanine HEL ABS tranche," the report states.
Merrill's interest rate committee on May 25, said it expected the Federal Reserve to actually cut rates early next year, effectively lowering the federal funds borrowing rate to 3%. The bank's economists are predicting no more than a 50 basis point rate hike this year.
U.S. Treasurys fell on Wednesday, however, as investors worried that Federal Reserve Chairman Alan Greenspan would testify in scheduled Congressional testimony Thursdat that inflation still poses a threat, thus signaling a series of upcoming rate hikes.