Garrick Werdmuller

Mortgage backed securities (MBS) prices are higher (rates lower) as money flows out of the stock market and into less risky fixed-income assets, like MBS; FNMA 4.0% coupon 100.27bps, +16bps. Low interest rates and falling home prices are giving only a limited boost to home sales, according to Mortgage Banker Association weekly survey as the purchase index improved only 1.4% while mortgage rates are at rock bottom levels. Refinancing has benefited, though demand has been slowing with the index down 11.2% last week. Fewer jobs, falling home values & the biggest loss of household wealth on record has limited the consumers ability to spend, as retail sales in April dashed market expectations significantly by dropping 0.4%. March's decline was also revised lower to negative 1.3%. The decline in sales was led by falling demand for electronics, furniture, clothing & groceries. Service stations sales also fell in April, even as fuel prices climbed. The import-price index increased 1.6% in April, as oil costs rose 15.4%. Excluding oil, prices fell 0.4% to extend a long run of declines connected to the global recession. Compared with a year earlier, import prices plummeted 16.3%. U.S. export prices increased 0.5% in April, as prices for agricultural exports rose 3.6%. The import price index is the first of three inflation gauges this week; Producer prices tomorrow % Consumer prices on Friday.

Mortgage backed securities (MBS) prices opened lower (-19bps) after Fed Chairman Bernanke's comments yesterday that he is encouraged by U.S. banks' plans to raise capital after government stress tests and with increased speculation the worst of the world wide recession may be over reducing demand for the safety of fixed income assets, like MBS. The market has since turned around; FNMA 4.0% coupon 100.08bps, unchanged on the day & the high. U.S. trade deficit, the difference between imports and exports, widened in March as the global economic downturn caused exports to decline 2.4%, numbers that bode ill for manufacturing. Imports also decreased, 1%, as a drop in demand for industrial supplies offset an increase in imported oil. Data from ICSC-Goldman & Redbook shows chain store sales rose 0.3% last week, boosted by warmer weather and Mothers Day with consumer traffic strong. Later today the Treasury Budget report is due out for April, typically showing a sizeable surplus from tax receipts, however fiscal stimulus and various bailout plans have pushed federal spending up sharply. Half way through the fiscal year the deficit stands at 956.8 billion, double last years at this time. Foreign investors do not like large deficts and an additional increase could shut off the flow of funds into the U.S., pushing up bond yields and mortgage rates. Major economic reports will come out later this week as investors shift attention to retail sales and inflation numbers.

Mortgage backed securities (MBS) prices opened strong (rates lower) but have since retreated as Fed Chief Bernanke testifies about the economic outlook before Congress's Joint Economic Committee and before the Treasury auctions $35 billion of 3yr notes later today; FNMA 4.0% coupon 100.19bps, +5bps. The Fed bought $8.5 billion in government securities yesterday, its biggest purchase since the buybacks began. The Treasury will auction $22 billion in 10yr notes tomorrow & $14 billion in 30yr bonds May 7th. Stocks around the world climbed on growing optimism the worst of the recession has passed. Banks are formulating plans for filling their capital requirements needed to weather a deeper recession as results of the stress tests are delivered. Credit markets continue to ease as the 3mo LIBOR fell below 1% for the first time; 0.99bps, down 2bps. The ISM non-manufacturing index, which makes up 90% of the economy, rose to 43.7 from 40.8 in April. The reading convincingly shows slowing rates of contraction and signals the economic slump is gradually abating. New orders were especially strong and employment also improved, pointing to lower levels of job losses.

Mortgage backed securities (MBS) prices are lower (rates higher) for a 4th day in a row as credit markets thaw and speculation grows that the worst of the global recession may be over; FNMA 4.0% coupon 99.84bps, -19bps. Treasury plans to sell record amounts of securities, including $71 billion next week, to finance a widening budget deficit, bank bailouts and fiscal recovery packages. The yield spread, or difference between 2yr & 10yr rates, increased to 224bps, most since November. This indicates investors are predicting faster inflation and demanding more return to lend to the government. Indicators show that efforts to increase lending are starting to work; 3m LIBOR fell to 1.01% today. MBS prices have moved lower since the Fed announcement Wednesday due to a lack of new actions to hold down rates, along with a more optimistic economic outlook. Consumer Sentiment rose to 65.1 from a mid-month reading of 61.9 and a March reading of 57.3. Strength in future expectations indicates that the consumer may think the worst is now behind. ISM Mfg Index rose to 40.1 in April vs 36.3 in March, and continues to show slowing rates of contraction after a collaspe in inventories caused orders and production to steady. New orders and backlog orders really improved, while prices paid, despite firmness in energy prices, continues to show steep contraction. Factory orders fell 0.9% in March, but this report is overshadowed by the ISM report which offers a look at April. Looking ahead, the shutdowns in the transportation sector, which will begin to hit soon, will cloud the whole outlook for the manufacturing sector in the coming months.

Mortgage backed securities (MBS) prices are little changed after the government said it plans to sell a record $71 billion in long-term debt next week and before the Treasury Dept. will sell a record $26 billion of 7yr notes today. The administration needs to finance its unprecedented fiscal stimulus and financial rescue programs. Since October 1st, the budget deficit has reached $956.8 billion with projections for it to reach $1.8 trillion. FNMA 4.0% coupon 100.38bps, -3bps. Mortgage rates have been falling, down to 4.62% from 4.73%, but according to Mortgage Bankers Association weekly survey, purchase applications fell 1% and refinances dropped 22%. First quarter GDP contracted more than expected, plunging 6.1% after a drop of 6.3% for 4th quarter 2008, capping the weakest six months in 50 years. The recession persisted even as lower gasoline prices and larger tax refunds helped consumer spending but a record slump in inventories and further declines in housing were too much to overcome. The Fed Open Market Committee (FOMC) concludes a two-day meeting with an announcement at 11.15am pt; investors will be closely watching as the last Fed announcement on March 18th produced a huge reaction in the MBS markets.