Monday, 2/8/10 4:12 PM

Might have been that the Super Bowl yesterday tired everyone out, the stock and bond markets were very peaceful today with little change in levels from 10:30 until the final hour when additional selling sent the indexes to lows of the day; not much volume today. Here in Indianapolis we are sad that not only didn't we go for a perfect season, we lost the big one; congratulations to the Saints, they just beat up the Colts. With no data or news of consequence the markets had nothing to think about. The bond market does have the auctions this week beginning tomorrow through Thursday but for months Treasury borrowing has met very good demand so not to worry is how traders are viewing it. The bond market has seen some ongoing safety buying, helping to keep things from getting any downside momentum, while the issue of supply on tap keeps prices somewhat pressured. Traders report some fund and bank buying interest on the mid-curve stuff, but overall it is very slow and thin.

Although quiet today, the markets do have a lot to think about this week. Obvious supply, but the more pertinent issue will be Bernanke's testimony on Wednesday if weather permits. He is scheduled to testify at the House Financial Services Committee as part of his required semi-annual testimony to Congress on monetary policy with many seeing it as the official beginning of the Fed's plans to exit its easy policies. It may be the beginning but the Fed will not move rapidly to tighten and it will be closer to the end of this year before the Fed increases the Fed funds rate. Other more subtle ways to back off; no more MBS buying, increasing the interest rate paid to banks that have excess reserves, ending most of the lending programs, all add up to an end of easy money policies. His testimony, whenever it occurs is being seen as the opening of the Fed's baby-steps to unwinding accommodation and the assorted remaining bailout measures.

Moody's is saying commercial real estate losses could top $150B by the end of next year; if so that implies banks have only begun to take the hits coming. The 65 U.S. banks rated by Moody's lost $43B on CRE credits from 2008 through the third quarter of 2009. Those lenders are projected to lose another $77B through the end of next year.

Lenders originated $86.1B in FHA-insured single-family loans in the fourth quarter, up 21% from same quarter in 2008. The Federal Housing Administration reported that 60% or $51.8B of the endorsements involved home purchase loans during the final quarter of calendar year 2009. Meanwhile, FHA insurance-in-force grew by 24% during in the calendar year to $752.6B as of Dec. 31. But the percentage of singe-family loans 90 days or more past due grew by 34%. FHA ended the year with a 9.12% default rate, up from 6.82% at yearend 2008. Housing officials are raising the FHA upfront mortgage insurance premium 50 basis points to 2.25% this April to cover rising claims and losses. Foreclosures involving FHA-insured loans totaled 20,650 in the fourth quarter, up 41% from the same quarter in 2008. The use of short sales to avoid foreclosure shot up 140% from a year ago to 2,925 in the fourth quarter of 2009. (Nat'l Mtg News)

Even the Mortgage Bankers Assoc was oblivious to the real estate bubble; the trade group sold its "new" headquarters last Friday that it purchased at the height of the bubble, for $41 mil, about half of what it paid just three years ago.

Tomorrow Treasury will sell $40B of 3 yr notes at 1:00; the auction is expected to go well. The previous, solid, $40B 3-yr rate at 1.490% with a bid-to-cover ratio of 2.98 and an indirect bidder take of 38%. At 10:00 Dec wholesale inventories, not a big market mover, is expected to show inventories increased 0.6%. We like to look at the inventory-to-sales ratio for some clue on demand in relation to the levels of inventories.

PRICES @ 4:00 PM

10 yr note:                               98.11 unch 3.57% unch

5 yr note:                                 100.00 unch 2.24% unch

2 Yr note:                                 100.06 unch 0.77% unch

30 yr bond:                              97.28 +18/32 4.50% -4 BP

Libor Rates:                             1 mo 0.228%; 3 mo 0.250%; 6 mo 0.386%; 1 yr 0.842%

30 yr FNMA 4.5 Feb:                101.12 -2/32 (.06 bp) (+1/32 (.03 bp) frm 9:30)

15 yr FNMA 4.0 Feb:                102.01 -1/32 (.03 bp) (unch frm 9:30)

30 yr GNMA 4.5 Feb:               101.24 -2/32 (.06 bp) (+1/32 (.03 bp) frm 9:30)

15 yr GNMA 4.0 Feb:               102.24 -1/32 (.03 bp) (unch frm 9:30)

Dollar/Yen:                             89.31 -0.18 yen

Dollar/Euro:                           $1.3668 +$0.0005

Gold Apr:                                $1064.60 +$11.70

Crude Oil Mar:                        $71.89 +$0.70

Goldman-Sachs

Commodity Index:                 480.70 +5.05

DJIA:                                      9908.39 -103.84 (first time since Nov under 10K) 

NASDAQ:                                2126.05 -15.07

S&P 500:                                1056.74 -9.45