John Tuggle

At 9:00 this morning the 10 yr note traded down 16/32 at 2.71% +6 BP; mortgage prices at 9:00 were -4/32. The stock indexes at 9:00 were pointing to a weaker open after the 497 point rally yesterday. A big day today; this morning Bernanke and Geithner are testifying in Congress at Barney the Frank's committee in the House (again) on the AIG thing on paying bonuses. Congress is about as helpful these days as a cold sore. The Geithner plan announced yesterday is still being analyzed this morning; PIMCO and Blackrock have signed on to take part in the public-private plan to take assets off banks' books and freeing up the market in toxic assets. A bold program on the order of the RTC plan 15 yrs ago where private equity got 85% loans from the government to buy up failed S&L assets. A plan that some are worrying that banks themselves may balk at once there is a dollar amount attached to the junk they are stuck with. A plan that some worry that with Congress acting like school children that lost their ball to bullies and taking it out on first graders; will eventually want their cut if private investors rake in nice profits. A plan that if it fails will drive the economy into a more prolonged recession.

Getting toxic loans off banks' books investors will put up $1.00, the PPIP (public-private investment program) will put up a $1.00, then the FDIC will leverage that up to 600% to buy the loans. Banks will have to sell the junk at a price that entices the private money. The loans purchased by investors and PPIP will be managed by private managers until the loans are paid off or re-sold. The FDIC will guarantee $12.00 for each $1.00 from private investors. . The second part; freeing up the market for toxic securities; Treasury will approve five large fund managers to raise $1.00 the raised capital will be matched dollar for dollar from the PPIP, Treasury will provide loans of 50% to 100% of total equity, then the funds will be used to buy asset backed securities and mortgage backed securities.

A Stampede to get out of the TARP program? Goldman Sachs is making plans to get the money back to the government; JP Morgan/Chase also hurrying to pay back the TARP money. Congress set the tone with its maniacal tirades and tax plans against AIG. Unintended consequences; Congress's actions may lengthen the time it takes to free up the credit markets as banks return the funds and then are left with little to lend. Good news in a sense; markets do not trust government, as it should be.

Not to be overlooked; Treasury begins raising $98B today with $42B of 2 yr notes; tomorrow $34B of 5 yr notes and Thursday $24B of 7 yr notes.

No economic reports scheduled today.

Last Wednesday the 10 yr note yield fell 50 basis points on the announcements from the Fed that it would buy an additional $750B of MBSs and buy $300B of longer term treasuries. At 9:30 this morning the 10 yr has given back 20 basis points of that move. Mortgage rates dipped slightly below 5.00% last Wednesday, now back above 5.00%. While all the current focus is on Treasury and "The Plan", behind the scene fixed income markets are concerned that sooner rather than later (if all the government plans work and the economy begins to recover inflation will storm out of the shoot. Whether the plans work remains a big question, even if they do help free up credit markets there is no direct corollary that it will feed into bank lending and economic rebound. Long term treasuries are stuck in a 50 basis point range with nothing on the horizon now that will break it out.

The dollar is stronger this morning; crude oil down about $1.00. Gold is off over $28.00 so far this morning.

Treasuries and mortgages started better this morning but couldn't be completely sustained as the day wore on. Nothing but talk of whether or not the 30 yr fixed rate can get to that elusive 4.5% that the NAR made famous months ago. It got burned in consumer minds and likely did some disservice to many buyers that found themselves having to accept higher rates as rates inched up for to months. Now we are back to the lows once again (4.875%) and the question is back again. The short answer is that it is unlikely mortgage rates for basic 30 yr vanilla mortgages will fall to 4.5%.

Getting to 4.5% would require treasury rates to decline another 50 basis points from present levels, the 10 yr down to 2.0% area. That is a huge mountain to climb;

• Treasury borrowings will total about $1.75T this year from 2s to 30s.
• Mortgages are very unlikely to get enough investor interest to accept mortgages at 4.5% with property values still declining.
• 4.5% on 30s would set a new all-time record low (since 1955), not likely in this environment; at 5.00% mortgages are at 50 yr lows now.
• Mortgages still have a rank smell to them after the losses on sub primes.
• Banks will not get aggressive in their buying and likely will drag feet if mortgage prices continue to increase.
• When the Fed announced it would purchase $500B of mortgages last Dec, mortgage rates fell to where they have today; now its $1.25T in mortgage purchases and $300B of long term treasuries (10 yr notes) and interest rates unable to crack technical resistance levels.
• Warehouse lending is almost dried up, that will filter down to consumer prices and rates.
• Inflation, not now, but coming; will be a hurdle for investors making fixed income investments.
• Many impediments to lower mortgage rates; all that said, it will take a day or two to completely sift out the reactions from the Fed yesterday.

The one caveat; if the Fed continues to buy MBSs and treasuries the 4.5% level could be reached, but we see that as a real long shot.

The move by the Fed yesterday has kicked the legs out from the dollar; it has fallen $0.06 against the euro and 2.50 cents against the yen in 24 hours (both big moves). Gold is up $70.00 today and $20.00 yesterday on dollar weakness. Crude oil up $3.50 to over $51.50. All commodity prices are increasing today.

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The Conference Board's index of leading indicators, a gauge of the economy's direction over the next three to six months, fell 0.4% in February, less than -0.6% forecast.

Bill Gross (PIMCO) said the Federal Reserve's purchases of Treasuries and mortgage securities won't be enough to awaken the economy. "We need more than that," Gross said today in a Bloomberg Television interview from PIMCO's headquarters in Newport Beach, California. The Fed's balance sheet "will probably have to grow to about $5 trillion or $6 trillion," he said. Presently its balance sheet is at $3.15T with the announcements yesterday (when they actually do the deeds).

There are no economic releases tomorrow. Markets will work on weekend adjustments. The Apr crude oil contract expires tomorrow; on Monday May will be the spot price, May is $0.50 higher today than the May contract.

See full article by Alan Zibel, Associated Press by clicking here

By now you know; the Fed made major moves this afternoon to lower mortgage rates and keep long term treasuries from increasing in yield. Re-capping; the Fed will increase the amount of MBSs it will purchase by $750B, taking the overall total to $1.25T of MBSs purchases this year (the original amount the Fed agreed to was $500B). The Fed will increase by $100B the amount of Fannie and Freddie debt taking the overall to $200B in notes to be purchased. The third leg; the Fed will buy at $300B of long term treasuries in the next six months. Entire Fed statement http://www.federalreserve.gov/newsevents/press/monetary/20090318a.htm (copy and paste)

It has taken two hours to settle the markets down after the FOMC statement; and we don't expect complete settling for the next two days. Is it good news? Absolutely! A necessary and well-past due move. Finally something directly to the housing and mortgage industry; but it isn't likely to be an easy re-finance boom as we had in the days before the sub prime mess finally ended. As our friend Lou Barnes reminds, the mortgage origination system has been decimated with very little warehouse money available and most lenders turning away from brokers (Chase, the geniuses of the mortgage business, per Jamie Dimon) was one that just pulled out of warehouse lending. Besides that there isn't enough staff in the industry at the wholesale level to handle the potential onslaught of re-financings. All that said, what I say is "its about time a big move came from Washington".

The dollar is taking a real whacking this afternoon on the FOMC moves. Not sure yet what impact that will have on foreign sovereign debt holders (indirects). Inflation isn't a present worry; the Fed is choosing to put out the fire now and worry about the re-building later.

How low will mortgage rate fall? Is the 4.5% level likely to be hit? Instead of stepping out with an opinion now, we need to wait a day or so and let the shock of what the Fed did today sink in. We were in the minority that the FOMC would make the moves today, and didn't believe we would see both treasury buying and MBS increases; markets were in paralysis for 45 minutes after the 2:15 statement. Those CNBC talking heads were so shocked a couple couldn't speak for a few seconds. Lets hold off on the magnitude of the Fed's actions for a day or so to see how markets settle in to this news.

If we are to see a huge re-financing market mortgage rates will have to remain low for months; the time from app to closings will be widened even more than presently. The Fed is now out of the game for at least four to six months with the moves made today. The Fed has interest rates in its hands; next up Treasury, if it ever gets a workable plan with details on TALF programs. Today the Fed got on board with the BOE and BOJ in quantative easing. Not likely it will follow with more until needed, that will take time.

Tomorrow weekly jobless claims, expected to be down14K; March Philly Fed business index, epected at -40.0 frm -41.3 in Feb.

Crude is at $50.00 level; if the dollar keeps declining crude will break above $50.00; T. Boone is forecasing $75.00 by yr end

The Federal Reserve on Wednesday surprised financial markets and committed to buy $300 billion in longer-term Treasurys to help the struggling American economy recover. The Fed also tweaked its other credit-easing programs by committing to buy more mortgage-backed securities and agency debt and include more asset-backed securities under a new credit facility starting this week.

Most analysts had thought that the Federal Open Market Committee - the policy making arm of the central bank -- would keep the weapon of buying Treasurys in reserve in case of a crisis. The decision to buy Treasurys shows that the crisis is here. "To provide greater support to mortgage lending and housing markets," the FOMC said it would purchase an additional $750 billion of agency mortgage-backed securities. This brings the total amount of agency mortgage-backed securities to $1.25 trillion. The Fed said it would double its purchase of agency debt to $200 billion.
"Moreover, to help improve conditions in private credit markets, the FOMC decided to purchase up to $300 billion of longer-term Treasury securities over the next six months," the statement said.

In addition, many unspecified types of assets will be included in the newest Fed credit facility, the Term Asset-Banked securities. All of these purchases will increase the size of the Fed's balance sheet. The central bank has already doubled the size of its balance sheet to just below $2 trillion. No shoots of recovery noted

The Fed was more pessimistic about the economic outlook, in a statement released after its two-day meeting. Officials removed language saying they expected the economy to recover later this year. The Fed repeated that deflation was a risk to the economy. The Fed said the economy was "weak" and latest information only showed further contraction. There was no mention of any "green shoots" of recovery that Fed chief Ben Bernanke mentioned seeing in his interview on Sunday with 60 minutes. Economists expect that the economy is shrinking at a 4.8% annual rate in the first three months of this year. Growth fell 6.2% in the fourth quarter of 2008. The Fed said that it still believed that the programs that it has put in place, combined with fiscal stimulus, would be able to pull the economy out of the ditch. The vote on the statement was unanimous.

Experts said the Fed would likely concentrate its Treasury purchases in the 3-to 10-year range.
"Our guess is that the bulk of the Fed's purchases would be in the 3-to10-year range," wrote Lou Crandall, economist at Wrightson ICAP in a note to clients. He said the Fed would not concentrate in the 20-30-year sector because it is not a critical source of funding for private-sector borrowers."

There are two reasons to buy Treasurys. The Fed would like to lower credit spreads on other loans. Some Fed officials may have supported the move because the purchases fall under the control of the full FOMC with the district bank presidents.
The other Fed programs are controlled in Washington by the Fed board of governors