Tuesday, 2/2/10 10:12 AM

The rate markets continue to trade in a narrow range with little movement, just churning in a 10 basis point range for the 10 yr note and mortgage rates. This morning the bond market started generally unchanged with the key stock indexes trading around unchanged from yesterday. Yesterday the equity markets rallied sending the rate market prices slightly lower. At 9:00 this morning the DJIA index up 4 points, the 10 yr note +2/32 and mortgage prices unchanged. At 9:30 the DJIA opened +16, the 10 yr note at 9:30 +3/32 and mortgages -1/32 (.03 bp) frm yesterday's close.

At 10:00 Dec pending home sales, contracts signed but not yet closed, expected to be up 1.1% after falling 16.0% in Nov, were +1.0%. Nov revised to -16.4% frm 16.0%; sales are up 10.9% from Dec 2008.

D.R. Horton, the second largest homebuilder reported its first profit since 2007; good news but most of it comes from a tax break allowing builders to carry back losses on land sales going back 5 yrs. Net income for the first quarter ended Dec. 31 was $192 mil, or 56 cents a share, the company said in a statement today. D.R. Horton posted a loss of $62.6 million, or 20 cents, a year earlier. Horton’s revenue from home sales for the quarter rose 23% to $1.1 billion. Net sales orders increased 45% to 4,037. The tax credit amounted to $149.2 mil. It is slow but builders are recovering; after cutting back, selling assets at huge discounts and reducing unsold inventories.

Paul Volcker, former Fed chair (1979 -1987) and current chair of the Economic Recovery Advisory Board, will testify at the Senate Banking Committee at 2:30 this afternoon on regulations to limit high-risk bank activities. Congress and the Administration are set on regulating banks in the future to reduce their ability to sink the economy as they did with gusto in this decade. Should banks be prohibited from high risk investments and trading. or should they be allowed to continue as they have since the repeal of Glass-Steagall in 1999? The proof of the pudding is in the eating; banks were let loose and within seven years almost sunk the ship. If banks are allowed to continue as they have, controls must be put in place that limits their exposure. How that will be accomplished is still debatable. The “Volcker rule” under which commercial banks would be prohibited from owning hedge funds and limited in how much they could trade for their own account is the meat of the testimony today.

Meanwhile, at the Senate Finance Committee; Treasury Secretary Geithner testifies before the Senate Finance Committee on the FY 2011 budget. Obama's budget at $3.8T with the budget deficit increasing to $1.6T in 2011 hasn't generated much enthusiasm. The president can submit a budget and act like it will be the end all but it is Congress that sets the budget. Cost cutting----forget it this year, tax increases we can count on. Tax increases are aimed at higher incomes and businesses and when passed won't put much of a dent in the deficit. The Federal budget deficit will be 12% of GDP for a few years and likely increase as Congress has little desire other than talking about it, to cut spending. Once health care is finally passed (likely not until after the elections in Nov) more deficit spending.

Later today Jan auto and truck sales will be out. This morning the rodent from Pennsylvania saw his shadow, six weeks more of winter. Someone should send the rat to Greenland. Last year the little hog bit the New York mayor. Barney where are you?  Obama going for another town hall meeting in New Hampshire.

PRICES @ 10:00 AM

10 yr note:                           97.27 +5/32 3.64% -2 BP

5 yr note:                             99.16 +4/32 2.35% -3 BP

2 Yr note:                            100.02 +1/32 0.84% -2 BP

30 yr bond:                          97.05 +7/32 4.55% -1 BP  

Libor Rates:                         1 mo 0.230%; 3 mo 0.250%; 6 mo 0.383%; 1 yr 0.842%

30 yr FNMA 4.5 Feb:            @9:30 100.30 unch (+2/32 (.06 bp) frm 9:30 yesterday)

15 yr FNMA 4.0 Feb:            @9:30 101.21 +1/32 (.03 bp) (-3/32 (.09 bp) frm 9:30 yesterday)

30 yr GNMA 4.5 Feb:           @9:30 101.09 +1/32 (.03 bp) (+2/32 (.06 bp) frm 9:30 yesterday)

15 yr GNMA 4.0 Feb:           @9:30 102.12 +1/32 (.03 bp) (+2/32 (.06 bp) frm 9:30 yesterday)

Dollar/Yen:                         90.30 -0.26 yen

Dollar/Euro:                       $1.3948 +$0.0020

Gold Apr:                            $1111.70 +$6.70

Crude Oil Mar:                     $75.29 +$0.86

Goldman-Sachs

Commodity Index:             498.44 +5.21

DJIA:                                  10187.87 +2.34

NASDAQ:                            2164.41 -6.79

S&P 500:                            1089.32 +0.13