Tuesday, 3/9/10 4:12 PM

It has been another quiet day in the financial markets with not much movement since the open this morning. Mortgage continue to get the play and have improved from the early morning pricing levels. There was no real news, no economic reports and nothing to get much attention.

The $40B 3 yr auction drew a yield of 1.437% with a bid-to-cover 3.13 and indirect bidders took 51.8% while direct bidders got a solid 10.3% chunk. The market did little even as the yield came in better than expected, with the 1.437%, the cover was the 2nd best on record, while the indirects take was also solid. The bonds did not take the offering so well, even as it went off near the top of its class. The previous $40B 3 yr had a yield of 1.377%, a higher than expected yield, with 2.83 bid-to-cover ratio and an indirect bidder take of 51.2%, while directs took 10.7%. The 10-auction average back to May averaged 2.89 on the cover and an indirect take of 52%. In the WI market this morning the 3-yr was running at 1.445%.

No inflation here in the USA but economists are beginning to worry that inflation is getting a foot hold in China. Tomorrow China will report consumer prices and they are expected to have increased 2.5%, the most in the last 16 months. If consumer prices are up 2.5% look for concerns that China will increase interest rates frm their 5 yr low. Price pressures are stemming from rising commodity costs, an overhaul of resource prices and the expansion of credit; China dished out $1.4T in loans last year and its economy is beginning to become over-heated.

Still no economic data tomorrow; Treasury will auction $21B of 10 yr notes at 1:00 and at 2:00 the Feb budget will hit with estimates of a monthly deficit of $210B, yes, $210B. Earlier, at 7:00 in the morning the MBA will release its mortgage applications data for last week. Today's 3 yr was good, we expect tomorrow's 10 yr will also be well bid.

Mortgages continue to out perform the 10 yr as the spread in yields between MBSs and the 10 yr, expected to widen this year when the Fed stops buying, the spread is the lowest in 25 years as investors are buying with the belief interest rates won't jump much this year.

No real change in interest rates yesterday and today as the market continues to chop with both eyes fixed on the equity markets that are leading the outlook for the economy. The stock markets were once again essentially flat today. The play has been in mortgages while treasury rates waffle in a tight range that has now held rates in a 10 basis point band for two weeks. Nothing but range trading, and it looks like it will take fresh news tot blow out of it.

PRICES @ 4:00 PM

10 yr note:                            99.13 +5/32 3.70% -1 BP

5 yr note:                              100.06 +5/32 2.33% -3 BP

2 Yr note:                              100.00 +2/32 0.87% -3 BP

30 yr bond:                            99.08 +7/32 4.67% -1.5 BP

Libor Rates:                          1 mo 0.230%; 3 mo 0.255%; 6 mo 0.394%; 1 yr 0.858%

30 yr FNMA 4.5 Mar:             101.15 +9/32 (.28 bp) (+5/32 (.15 bp) frm 9:30)

15 yr FNMA 4.0 Mar:             102.10 +6/32 (.18 bp) (+3/32 (.09 bp) frm 9:30)

30 yr GNMA 4.5 Mar:            101.30 +9/32 (.28 bp) (+5/32 (.15 bp) frm 9:30)

15 yr GNMA 4.0 Mar:            103.02 +7/32 (.22 bp) (+4/32 (.12 bp) frm 9:30)

Dollar/Yen:                          89.96 -0.33 yen

Dollar/Euro:                        $1.3598 -$0.0034

Gold Apr:                             $1120.40 -$3.60

Crude Oil Apr:                      $81.30 -$0.57

Goldman-Sachs

Commodity Index:               525.01 -2.73

DJIA:                                   10564.38 +11.86

NASDAQ:                             2340.68 +8.47

S&P 500:                             1140.45 +1.95