01/22/2009

The long end of curve got hit hard this morning on follow-through from yesterday's technical breakdown; at 11:00 this morning the mortgage market prices were off as much as 12/32 and the 10 yr note yield had popped up to 2.64% frm 2.54% yesterday. This afternoon some rebound on the 10 yr and mortgages. Technically, the Fannie 30 yr has managed to sustain its 40 day MA, the 10 yr however, both the yield and futures contract have broken their respective 40 day averages.

We have been talking about supply adding pressure to the treasury markets, this afternoon Treasury announced it will sell record amounts of 2s & 5s ($40B next Tues and $30B next Thurs, respectively) with $29B 3-months and $28B 6-months Mon. Rounding things out will be $8B 20-yr TIPS next Mon. Supply pressures from massive borrowings will continue to be pressure points for treasuries through the remainder of this year and well into 2010.

Investors are turning away from treasuries and moving to high grade corporates, but will likely stay away from MBSs with the outlook still bleak for the housing markets and valuations. After being sucked in by Wall Street and those now about defunct banks on sub primes and other non-traditional mortgages (Alt A, interest only, option ARMS, etc). the MBS market is fried and investors see it as folly at the moment. The basis for the still hard to believe sub prime market was that property values would continue to increase 10% to 20% a year for years. One of the most ill-conceived thoughts ever believed; if that premise had any real credibility no one in the US except Warren Buffet and Bill Gates would be able to buy a home in 10 yrs---starter homes at $400K in the heartland. Who stopped to think? No one apparently, we did but by the time we got the picture the game was almost over.

This morning the weekly MBA mortgage applications index went down 9.8% last week with refis slumping 12.4% and purchasing applications up 2.5%. The fixed 30-yr mortgage rate lightened to 5.24% (-18 basis point) while the 15-yr dipped to 4.99% (-3 BPs) and the 1-yr adjustable rate mortgages dropped to 5.22% (-17 BPs). MBA, Freddie and Fannie use different days of the week to calculate the weekly changes. The average rate for a 30-year fixed-rate mortgage jumped back above 5% to 5.12% during the week ended Jan. 22, according to Freddie Mac.

BofA got another $138B from the government when Merrill announced a $15+B loss for the quarter. John Thain, CEO of Merrill got the axe as facing saving was the name of the game for Ken Lewis, CEO of BofA. The bank took over Merrill with the help of government money, but BofA apparently didn't do its home work, or Thain mis-represented the numbers and outlook. Either way, Lewis is on the hot seat. Yesterday in a show of confidence and to deflect criticism over his management Lewis bought some BofA stock and saw share price increase 23%, today down 11%.

No economic reports tomorrow. Next week on Wednesday the FOMC meets; the first with a new Pres and new Treasury Sec. Since the last FOMC meeting the economy has been deteriorating at a more rapid pace, Obama is about to launch his stimulus package. Bernanke is buying mortgages as previously announced. Will the Fed be successful in jaw-boning against the recent increase in rates? Between now and the statement next Wed afternoon markets will likely chop with not much change from where they trade now.