01/06/2009

Treasuries traded weak at 7:00 with the 10 yr note down 40/32 and its yield at 2.50% +13 BPS from Friday's close. After a year when mortgages were the plague, with the Fed in the current picture buying mortgages and with expectations increasing that there will be more support for mortgages provided by the government, yesterday and so far this morning the mortgage market is showing its best performance against treasuries in over a year.

At 9:00 this morning the 10 yr note yield bumped up to 2.55% (+7 BP frm yesterday's close); mortgage prices increased 13/32 yesterday as the 10 yr price fell 33/32, this morning at 9:00 mortgage prices traded +10/32 with the 10 yr price -20/32. The spread between 30 yr mortgages and the 10 yr note has narrowed 35 basis points in the last three days.

Bernanke is intent on narrowing the spreads between consumer and corporate loans and the treasuries. After cutting the FF rate to zero investors are still unwilling to step off the treasury wagon and into other debt. The Fed is on the path now to open the credit markets and make it more attractive to investors. It has helped in the past few days, the spread between 30 yr mtgs and the 10 yr has narrowed by 50 basis points. Mortgage rates, based on normal spreads should be in the 4.20% area. One of the options under consideration: reviving the asset- purchase plan originally envisaged under the $700B Troubled Asset Relief Program run by the Treasury. The purchases could be combined with fresh injections of capital into banks, and the use of TARP money to help struggling home owners avoid foreclosure. Mortgages are benefiting in the last two sessions as treasuries are being liquidated somewhat.

We have been suspicious about getting mortgage rates to 4.50%, however it isn't impossible as long as the Fed lets it be known that it will do what it takes to, no matter the cost, to get the credit markets working. More purchases of MBSs from the agencies, taking some of the junk mortgages off the banks' books, arm twisting banks to begin lending. Treasury Secretary Henry Paulson originally envisaged using the $700B authorized by Congress under the TARP in October to buy troubled assets. He quickly shelved that plan as the crisis intensified. Get on the phone to Fannie and Freddie and instruct them to cut the fee raising episodes that have kept real rates higher than they should be. Fannie and Freddie are government owned and should not be in conflict with the Fed's intent in getting the housing sector turned around with low mortgage rates.

At 10:00 two economic reports; Nov factory orders, expected down 2.6%, were down 4.6%. The Dec ISM services sector index was expected at 37.0 frm 37.3, the overall index came in at 40.6; new orders component at 39.9 frm 35.4, price component at 36.0 frm 36.6 and employment at 34.7 frm 31.1---overall a much better ISM services report.

Nov pending home sales also at 10:00; was down 4.0% and -5.3% yr/yr. Nothing surprising in the report.

This afternoon Treasury will sell $8B of 10 yr inflation indexed notes; tomorrow $30B of 3 yr notes will be auctioned and on Thursday $16B of 10 yr notes will be sold by Treasury. Supply is adding to the recent treasury market selling at the long end of the curve.

Gold prices continue to fall; crude oil is up another $1.00. Gold is down over $30.00 since last Friday's close. The dollar is rallying well in the last few days; the dollar has improved by about $0.08 since last Friday---a big move in the currency world.