John Tuggle

After a little volatility this morning the mortgage markets settled down this afternoon. Stocks were lower all day but the trading didn't look anything like some kind of reversal, just taking a breather ahead of jobs data tomorrow and Friday. As usual with any declines in equities, going into the close the losses through the day were cut in half in the last 30 minutes from levels at 2:30.

This morning's ADP employment report may have taken a little wind from the sales of the markets, job losses at 532K in May and a revision from -491K in Apr to 545K isn't a strong building block.

Bernanke was testifying to the House Budget Committee today and did his usual best to paint the economy as one that has seen the worst, ditto on the financial system; but shot some arrows into the air. Spitting in the wind; "Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth," Bernanke said in testimony to lawmakers today. "Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance." Fiscal responsibility in Congress is a another oxymoron. His comments that the financial system is still stressed and unless fiscal constraint occurs the the fragile system could take another major hit; saying the Fed won't finance government spending over the long term.

"In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen," Bernanke said. "These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows and technical factors related to the hedging of mortgage holdings." Generally Bernanke said he thinks the economy will bottom before the end of the year. That statement is one we would not take on its face; consumers, although having to spend on necessities, are not about to spend enough or see incomes increase this year and possibly next. Bernanke said what any Fed head would be expected to say about the recovery; jawboning however, has its limits.

PIMCO's Bill Gross has coined the next phrase that the media will eventually beat to death; speaking to what kind of economic recovery, Gross said " its no longer shop 'til you drop, its save to the grave"; very apropos, He is right on and with the new mantra. Gross also continues to warn that the

Weekly jobless claims at 8:30 tomorrow; expected to be another increase of 620K, look for The Street and its pundits to spin it as good news. Also tomorrow markets will drop back to supply when Treasury releases the amounts for next week's dip in the well; 3 yr, 10 yr and 30 yr issues next week. Interest rate markets will have a tough hill unless the equity market finally capitulates into a retracement. Friday, the current estimate consensus (another oxymoron for job guesses) 630K job losses with a range of estimates between 495K and 625K.

Mortgages are a little better now than at 10:00 but no one we know of re-priced better. Lenders are not going to get aggressive with pricing in this environment and the bearish outlook that currently exists. We say it everyday, but we feel we have to; unless the view of economic recovery that is sending stock markets up changes interest rates won't do much better, add in next week's supply and it is not likely we can expect much improvement. It is a risky trade now to be holding rate locks; if jobs data indicate more losses than expected rate markets are not likely to see yields decline much. All that said, those that have an appetite should hold locks, mortgages at 4:00 are 8/32 better than at 10:00.

Selling in the mortgage markets continued today (until about 3:00) as wholesalers and originators race to get ahead of the increasing interest rate markets. It took two and a half months of rising 10 yr note rates, from 2.50% to 3.73% yesterday, while at the same time mortgage rates hardly increased. Yesterday someone turned on the light and realized that just because the Fed will buy a total of $1.25T of MBSs that would not be enough to counter the 125 basis point increase in the 10 yr note. That said, we are now looking for the 10 to retrace some of the rapid increase in rates and will also support the mortgage markets. Not likely though that the trend in the rate markets will turn from bearish to bullish so any rallies in rates should be seen as an opportunity to get some business done. Likely though, when there is an improvement in mortgage rates most will miss it as they will wait to long, being too greedy to squeeze the last drop out of the pipe.

The stock market is as strong as a rock, we continue to look for a retracement in that market, and yesterday it appeared we may have it; today, however the indexes rallied again, recovering much of the decline yesterday. Any real chance for a big decline in rates rests with the possibility that the equity markets will reverse and make a big move lower. So far equities have shrugged off any negative news in favor of the view that the economy has bottomed. A good example of ignoring bad news came this morning with the April durable goods orders; increasing 1.9% against forecasts of +0.5%, nice on the surface but in March durables were revised today from -0.8% to -2.1%; and March new home sales originally reported-0.6% were revised to -3.0% (April +0.3%). And the lower revisions from previous months has been the norm for many of the 45 economic reports released each month.

Auction of $26B 7 yrs saw a higher 3.300% with a bid-to-cover of 2.26 and an indirect bidder take of a near average 33.0%. The market was not impressed, but had also been fairly well prepared for a sloppy outing. Not as bad as many were thinking this morning and gave some relief to treasury rates as we move to the end of the session. Supply will take a rest now for two weeks, then back again with a 3 yr, 10 yr and 30 yr offering. So far the fear the Chinese would make good on their comments that it may not be so aggressive in buying US debt has not materialized.

Foreclosures are on the increase; foreclosure starts jumped 27% in the first quarter to 1.33% of all outstanding residential loans as state foreclosure moratoriums expired and it became clear that certain at-risk homeowners couldn't qualify for government-mandated loan modification programs. At year-end the foreclosure start rate was 1.08%. 53% of foreclosure starts in the quarter were so-called prime mortgages. According to figures compiled by the Mortgage Bankers Association, 9.12% of all home mortgages were in some stage of delinquency/foreclosure at the end of March, that equates to a total of $874B of delinquencies. 25% of all sub primes are delinquent; 7.28% of all mortgage loans are 90 days late.

Tomorrow more data; at 8:30 Q1 preliminary GDP is expected at -5.5%, up from -6.1% reported in the advance report a month ago. At 9:45 the May Chicago purchasing mgrs index is expected at 42.0 frm 40.1 in April. The U. of Michigan consumer sentiment index at 9:55 is expected to have increased to 68.0 frm 67.9 two weeks ago; last Tuesday the Conference Board reported its consumer confidence index jumped to a very strong 54.9 frm 40.8 in April.

We said this morning that the mortgage markets would be volatile today; they were. Mortgage prices started weak, got weaker and weaker, then about 3:00 this afternoon found traction and bounded to be unchanged on the day at 4:00. The 10 yr also was volatile; up early, then sold off at mid-day and then after the 7 yr note auction found footing to trade 7 basis points lower than yesterday's close. We can expect intraday and interday volatility to be high for the next week or so.

The FOMC policy statement was about the same as the March 18th meeting; the fly for treasuries and to a lesser extent mortgages, was that the Fed did not increase the purchases of treasuries or mortgages from what it announced at the March meeting ($750B of MBSs and $300B of treasuries). And the statement did indicate that economic activity had shown some improvement since the March meeting. That has been reflected in some of the recent economic data that has hit since the March meeting, particularly increases in consumer sentiment and confidence. click to read the entire statement http://www.federalreserve.gov/newsevents/press/monetary/20090429a.htmThat the Fed deliberately refrained from keeping support at 3.00% for the 10 yr blew the yield up to 3.12% on the initial knee jerk and took mortgage prices down on the initial move 20/32 clearly demonstrates that markets were hoping and trading on the idea the Fed would send the message it will keep rates from increasing. When that wasn't there traders turned on treasuries and to a lesser extent on mortgages and rates broke out of their tight four week range on the 10. As we have been showing in the charts in the morning reports for the past month, the technicals had been bearish on the RSI and moving averages, being held in check at 3.00% area. Mortgages however are in better shape technically with investors following the Fed in MBS buying; mortgages being originated today in the TBA market are likely some of the best in years in terms of credit quality and based on very subdued appraisals. By 3:30 the 10 yield remained at 3.09%, -18/32, while mortgage prices on the day bounced back to -6/32.(see below for 4:00 levels)

Almost an after thought; the $26B 7 yr note auction was not that well received. The yield at 2.63% with the cover at 2.28 versus 2.52 at the prior auction and indirect bidders taking just 33% of it from 28.0% in March, but the participation rate still trailed the 38.7% rate seen in February. Supply will continue to press on treasuries next week with another $71B hitting in 3s, 10s and 30s ( $35B 3-year note auction next Tuesday, a $22B 10-year note auction next Wednesday, and a $14B 30-year bond auction next Thursday).

Early this morning the MBA's purchase index fell 0.6% in the April 24 week. Refinancing applications were down 22% in the week but remain very active, making up three quarters of all mortgage applications. Thanks to government buying of Treasuries and agency debt, mortgage rates are at rock bottom with 30-year fixed loans averaging 4.62% for an 11 basis point drop in the week. Housing data have been showing some life but not MBA's report.

Tomorrow weekly jobless claims at 8:30 (unch); also at 8:30 March personal income and spending (-0.2% and unch respectively); the PCE inflation +0.2%. Finally at 8:30 the employment cost index for Q1 (+0.5%). At 9:45 the Chicago purchasing mgrs index (35.0 frm 31.4 in March).

Mortgage markets continue to perform better than treasuries; the spread between the 10 yr note and mortgages had widened to about 270 basis points earlier this year and now at 165 basis points; the spread that has been typical over the years.

Foreclosure starts are continuing to rise to record highs but total delinquencies fell in March to 7.88%, a month-over-month decrease of 5.8%, according to the April 2009 LPS Mortgage Monitor from Lender Processing Services, Inc., Jacksonville, FL. The seasonal February to March decline in delinquencies in the five years from 2002 to 2007 averaged 14%, and the number of newly delinquent loans saw a greater decline in March compared to 2008.

Treasuries this morning in early activity (8:00) were sitting unchanged from last Thursday; by 9:00 prices were increasing and yields falling. At 9:30 the 10 +13/32 at 2.88% -4 BP, mortgage prices at 9:30 +1/32. Today treasuries will likely find a little support as the Fed will buy more treasuries, part of its plan to purchase $300B of treasuries announced last month at the FOMC meeting. Interest rate markets are being supported fundamentally by the Fed's buying of treasuries and mortgages, but traders are not overly enthused at the pace of Fed buying so far, more dabbling than taking big bites. Technically, the 10 yr note is supported at the 3.00% level, successfully tested on 9 occasions since early Feb (see chart above). The one thing Bernanke wants is to keep the long end of the curve from increasing in yield; 3.00% is critical in that regard.

The central bank plans to buy treasuries due from March 2011 to April 2012 today and from September 2013 to February 2016 tomorrow, according to its web site. The Fed has more than doubled the size of its balance sheet to $2.09T in the past year by purchasing financial assets including treasuries in an effort to spur growth.

Thirty-year mortgage rates rose to 4.87% in the seven days ended April 9 from 4.78% the week before, which was the lowest since Freddie Mac began tracking the figure 37 years ago. Rates are 1.97% more than U.S. 10- year yields, widening from 1.46% points two years ago, and frm 2.60% last year.

No economic releases scheduled today. This week however is full of reads on the economy.

This Week's Economic Calendar:

Tuesday;

8:30 Mar PPI (unch, the core rate +0.1%)

Mar retail sales (+0.3%, ex autos +0.1%)

10:00 Feb business inventories (-1.1%)

Wednesday;

7:00 weekly MBA mortgage applications

8:30 Mar CPI (+0.2%, ex food and energy +0.1%)

NY Empire State manufacturing index (-35.0 frm -38.2)

9:15 Mar industrial production (-0.9%)

Mar capacity utilization (69.7% frm 70.9% in Feb)

2:00 Fed Beige Book

Thursday;

8:30 Mar housing starts (-5.3%)

Mar building permits (+0.5%)

weekly jobless claims (-9K)

10:00 Philadelphia Fed business index (-32.0 frm -35.0)

Friday;

9:55 U. of Michigan consumer sentiment index (58.5 frm 57.3)

12:00 Bernanke speaking

Note that many of the releases are expected to be slightly better.

Treasuries and mortgages are improving so far this morning; the 10 yr note is so well supported at 3.00% that it can't actually get there to re-test. Traders are completely convinced at the moment that 3.00% will not be breached that anytime the 10 gets over 2.90% buyers step up, so far a trade that has reaped nice gains. On the other side, when the 10 yield falls to the 2.75% area traders turn sellers. Early this morning the 10 traded at 2.93%, at 9:30 back to 2.85%. Mortgage rates of course follow the general direction of the 10, at 8:15 mortgage prices were off 2/32, at 9:30 up 5/32 frm Thursday's close.

Markets in London and Hong Kong are closed today.

The stock market is starting weaker adding support to treasuries and mortgages. More to the point however, it is a technical trade today in both equities and rate markets. The stock market blew up 246 points last Thursday, today talk on the NYSE is an overbought market. Treasuries are getting support today on technical's and the Fed buying more treasuries. With no direct data to focus on today the bond market will trade on how stocks perform. No treasury auctions this week takes the supply issue off the table. Take a quick look at the two charts; note the narrow ranges for both mortgages and the 10 yr; generally no directional movement and likely to remain that way for the rest of the week.

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PRICES @ 10:00 AM

10 yr note	99.04 +19/32 2.85% -7 BP * June 10 yr note contract 122.08 -3/32
5 yr note	99.21 +10/32 1.82% -7 BP
2 Yr note	99.30 +3/32 0.90% -5 BP
30 yr bond	96.21 +35/32 3.69% -6 BP * June 30 yr bond contract 126.31 +34/32
Libor Rates	(London closed)
30 yr FNMA 4.0 June	99.17 +5/32 (-1/32 frm 10:00 Thursday)
15 yr FNMA 4.0 June	101.00 +2/32 (+1/32 frm 10:00 Thursday)
30 yr GNMA 4.0 June	99.20 +6/32 (+3/32 frm 10:00 Thursday)
15 yr GNMA 4.0 June	102.02 +2/32 (+2/32 frm 10:00 Thursday)
Dollar/Yen	100.23 unch
Dollar/Euro	$1.3287 +$0.0104 (dollar weaker)
Gold June	$897.40 +$14.10
Crude Oil May	$49.26 -$2.88
Goldman-Sachs Commodity Index	369.22 -9.98
DJIA	7991.23 -92.15
NASDAQ	1638.96 -13.58
S&P 500	848.87 -7.69

Monday, 4/13/09 10:30am

On Wednesday, the Senate unanimously approved my amendment to the Fiscal Year 2010 Budget Resolution that seeks to stimulate the nation's declining housing market by providing for a $15,000 tax credit to individuals who purchase a home in the next year. My amendment creates a deficit-neutral reserve fund for providing a nonrefundable federal income tax credit for the purchase of a principal residence during a one-year period.

It would also ensure that there is room available in the Fiscal Year 2010 budget for a homebuyer tax credit to be passed at a later date. I plan to introduce my $15,000 tax credit as a stand-alone bill in the next few weeks.

Our economic crisis started with housing, and our economy will continue to suffer unless we do something now to immediately fix the housing problem. I'm pleased my colleagues in the Senate understand the importance of creating targeted incentives that will encourage Americans to buy homes again and implement the first step in my four-point plan to economic recovery