Market Update 09-18-2008

US Stocksare experiencing another roller coaster day as the Dow has been both up, and down by over triple digits, and is currently up over 300 points. Mortgage Bonds have also been up and down all day, but stayed within their recent range of resistance and support.

Once again Market headlines rule the day, and force economic reports to the back of the bus. In a week that has seen two investment banks go away, and one of the world's largest companies be bailed out by the US government, is it really a surprise to see the world's Central Banks work in a concerted effort to inject nearly $200 Billion into the Financial Markets? In response to a recent spike in the rate banks charge each other for funds, and prevent banks from hoarding cash, the Central Banks of the US, Europe, Switzerland, Japan, England, & Canada have moved to provide $180 Billion into short term money markets. Similar moves were implemented by China's Central bank, as well as Hong Kong, Australia, and India. Money Market funds have long been considered the safest of all investment vehicles, but the recent failure to perform by the oldest such fund - Reserve Primary - due to losses incurred by Lehman's failure, brought such uncertainty to the market that banks were freezing up. The move effectively provides unlimited liquidity to the markets, and goes to show the Central Banks will do whatever is necessary to prevent further erosion of the credit situation.

Mortgage Bonds have followed the lead of Stocks as they have been up and down in a nearly 100bp range. While they have fallen below levels of support for brief periods, they have bounced back each time, and are currently right in the middle of that support, and resistance pricing range. My recent posts have remarked how much there has been a "Flight to Quality" of capital flowing out of Stocks, and into Bonds (specifically government Bonds). There has been so much of this that the yield from Treasury Notes has literally gone to zero, and in the cases of some short term paper, even negative. This irrational fear is the equivalent of stashing your cash under your mattress. Early this week the return on a 3 month Treasury bill was 0.0304%, which meant that if you bought $1 Million worth, you would make $76 upon maturity! Remember, this is despite the explicit direction provided by the Treasury bailout of Fannie & Freddie, to increase the desirability of Mortgage Backed Securities, not T-bills! Today's injection of capital has eased the situation somewhat, and we are beginning to see yields rise for Treasury's, which tightens the spread between them, and Mortgage Bonds, which in turn is positive for interest rates.

I am again recommending to float as I expect next week to show further improvement, and hoping that anyone who is closing within days has already locked. Keep in mind though, rates are still at, or near, their best levels of the year.

Make it a great day!

Ron Brown

FHA & VA Loan Specialist

First Mortgage Company of Washington