Barry Bonds and Mortgage Bonds: Are They So Different?

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Matt Murphy, the man who caught Barry Bonds' 756th home run ball, is holding onto a valuable piece of babseball memorabilia. 

According to some, the ball could fetch as much as $500,000 in auction bidding.

If in the future, Barry Bonds is found to have used steroids, though, the value of Home Run #756 will drop dramatically. 

Most people get this concept. 

The ball's current valuation model is based on the premise that Barry Bonds did not use performance-enhancing drugs during his career.

If he did use steroids, however, the model used to price the ball today is flawed.  If it happens, we can only guess what the ball will really be worth.

This same line of thinking is what is causing mortgage markets to gyrate lately. 

The financial models that determined the "risk" in mortgages are now being proven to have been flawed.  And there is no history on which to base a new pricing model.

Until new financial models are tested and "approved", therefore, markets will continue to literally guess what mortgage bonds should be worth -- just like we'd have to do with a the-clear-and-the-cream-tainted Barry Bonds 756th home run ball.

Investor funds are trimming their overall risk exposure to compensate for the added risk of mortgage-related holdings.  And, until the broader market defines what a mortgage bond is worth, many investors are trying to stay as cash-heavy as possible. 

This is one reason why there is a global "dump" of stocks, bonds, and everything else.  Once the risk is finally defined, markets should regain their balance.