A major increase in borrowing as Treasury funds the government spending to attempt to get the economy turned around. Sooner rather than later the massive borrowings will have a negative impact on US interest rates

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Mortgage and Lending with John Tuggle, Senior Mortgage Loan Originator, Envoy Mortgage, Ltd. NMLS# 211187
Treasury will sell record amounts of 2-5-and-7-yrs next week offering $40B 2s, $32B 5s and $22B 7s (the first issue of that maturity since 2000), Tues, Wed and Thurs respectively, along with $31B 3-mo and $30B 6-mos. This morning we were estimating a total of $97B so this is $3B less, but still a major increase in borrowing as Treasury funds the government spending to attempt to get the economy turned around. Sooner rather than later the massive borrowings will have a negative impact on US interest rates. The WSJ reports on a survey of company chiefs and CPAs, "About 83% said they were "pessimistic" or "very pessimistic" about the U.S. economy over the next year. Just 5% said they were "optimistic" about the outlook. In November, more than 40% said they expected a recovery in the second half of 2009. Now just 30% expect that, while 41% expect a recovery to begin in the first half of 2010 and 20% expect the turnaround to start in the second half of next year." The details of the mortgage plan to bail out defaulting buyers are still coming out, we will not have the complete details until March 4th according to Pres Obama in his speech yesterday. That said, the reception on Wall Street and in Chicago at the Merc is a chilly one. No bounce in stocks today and interest rates are in a bearish mode. Part of the selling in treasuries today is setting up for the auctions next week, but some is a reaction to the continual spending plans that so far can only be judged successful when argued against doing nothing. Obama administration officials have decided to limit refinancings of "underwater" Fannie Mae and Freddie Mac mortgages to a loan-to-value ratio of 105% so the new mortgages can be securitized, according to Federal Housing Finance Agency director James Lockhart. "That is why the line is drawn there," Mr. Lockhart said at a meeting of government accountants. The refinancing program is designed to lower borrowers' mortgage rates, which the Federal Reserve Board and Treasury Department are trying to drive down by aggressively purchasing GSE mortgage-backed securities. About 75% of the mortgages with LTVs above 80% the government sponsored enterprises own or guarantee fit under the 105% cap. If the program is successful, four million to five million mortgages may be refinanced. Servicers are already "overwhelmed," Mr. Lockhart said, and they didn't want to push the LTV any higher because of capacity issues. He also noted that the GSEs have other loan modification programs to deal with more problematic underwater mortgages. (Nat'l Mtg News) Tomorrow the only data is the Jan CPI at 8:30; expectations are for the overall CPI is +0.3%, the core rate at +0.1%. This morning the Jan producer price index jumped unexpectedly to +0.8% overall and the core at 0.4% taking the yr/yr core producer inflation rate to 4.2%. It is mostly oil prices through most of last year; we don't see any inflation coming, but if tomorrow's CPI renders another shock the bond market will take it hard and drag mortgage rates up along with treasuries. Technically the 10 yr still has strong support at 3.00%, but if next week's auctions are not well bid, especially from indirects the 10 will likely break 3.00% and move quickly to 3.25% taking mortgage rates up 25 basis points. The DJIA low last Nov was 7449.38, today's low hit at 7447.55 at 3:42 PM; all the stimulus and mortgage relief plans have gained zero enthusiasm from markets so far. We continue to look for the support to hold or if cracked won't fall much below the low. If we are wrong and the DJIA does make a sustained run under the Nov lows the index may fall another 1000 points or more; a move we were not expecting until later this spring or summer. The DJIA did manage to hold albeit 2 points lower than the Nov level. Continue to keep all rate locked loans locked overnight. -------------------------------------------------------------------------------- PRICES @ 10:00 AM 10 yr note 99.07 -20/32 2.84% +7 BP * Mar 10 yr note contract 122.18 -36/32 5 yr note 99.14 -7/32 1.87% +5 BP 2 Yr note 99.25 -1/32 0.98% +2 BP 30 yr bond 97.09 -51/32 3.65% +9 BP * Mar 30 yr bond contract 126.25 -60/32 Libor Rates 1 mo 0.473%; 3 mo 1.250%; 6 mo 1.789%; 1 yr 2.101% 30 yr FNMA 4.5 Apr 100.16 -7/32 (+2/32 frm 10:00) 15 yr FNMA 4.5 Apr 101.18 -3/32 (+4/32 frm 10:00) 30 yr GNMA 4.5 Apr 100.17 -6/32 (+5/32 frm 10:00) 15 yr GNMA 4.5 Apr 102.12 -2/32 (+5/32 frm 10:00) Dollar/Yen 94.37 +0.72 yen Dollar/Euro $1.2664 +$0.0100 (dollar weaker) Gold Apr $974.90 -$3.30 Crude Oil Mar $38.95 +$4.33 Goldman-Sachs Commodity Index 317.91 +11.14 DJIA 7465.95 -89.68 NASDAQ 1442.82 -25.15 S&P 500 778.95 -9.47 Thursday, 2/19/09 4:30pm

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