In an emergency move, the Fed cut the discount rate (the rate on direct loans to banks) by 0.25% to 3.25%. The Fed also announced that it will create a lending facility for the 20 primary dealers (the first time the Fed has extended financing to non-banks since the Great Depression), which will remain in place for at least 6 months. Bear Stearns continues to make headlines this morning on news that JP Morgan will purchase the firm for $2 per share, which is less than 1/10th of the Bear's value as of the close last week. The Fed has agreed to provide up to $30B to JPMorgan to help finance the purchase. Continued Fed emergency actions demonstrate that serious risks to the economy remain. Tomorrow, the FOMC will meet, and the futures market has increased odds that the Fed will cut the Fed Funds rate by 1.0%. Treasuries and mortgages are higher this morning, as the markets adjust to assumptions for tomorrow's FOMC meeting.
In economic news, today will bring the current account balance for the 4Q, Empire Manufacturing for March, and the NAHB housing market index for March. The markets will likely look past today's events, however, in preparation for the FOMC rate decision tomorrow.
On Friday, mortgages opened 5 to 6 ticks tighter and continue the trend after unchanged CPI numbers. After digesting the Bear news, mortgages widened and closed 6 to 10 ticks wider to swaps. At 5pm, the FNCL 5.5% in Apr was +11/32 (100-3) and the FNCI 5.0% in Mar was +5.5/32 (100-25+). Ginnie/Fannie swaps moved higher on Friday, as investors preferred to own securities backed by the US Government.
Current Market Levels:
2-year +6/32nds (1.332%)
10-year +12/32nds (3.378%)
FNCL 5.5% April +13/32nds (100-12)
Look for mortgage rates to do some declining abbeit volatile given all that's happened over the last 72 hours. I've never seen a market as volatile as we have here. Nice rates, but stay tuned....or at least fasten your seatbelts.
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