Wednesday, 3/17/10 4:13 PM

It was another quiet day with not much movement in the interest rate world. The equity markets managed to climb for the seventh day in a row on continued weak inflation now and in the immediate future. This morning the Feb PPI declined by 0.6% against estimates of -0.2%. No matter it was mostly the decline in crude in Feb, the details rarely trump the headlines. The core PPI (ex food and energy) was up 0.1% as expected. Yr/yr overall PPI +4.4% and when looked at the core alone inflation yr.yr up 1.0%, well below the supposed 2.0% the Fed is targeting. 

The mortgage markets remain solid, although only minor price improvement so far this week (.31 bp). A lot has been anticipated that mortgage rates will increase once the Fed ends its buying at the end of this month; so far what appears to be the case is that the mortgage markets may be in much better shape than most have believed. From a practical point of view the Fed has really finished now; just a few more billion to be purchased after buying almost $1.25T. Mortgage markets holding in quite well so far. With the outlook that inflation isn't an issue now or in the foreseeable future, investors may be looking more seriously at mortgages that return higher yields with government guarantees. While investors still see mortgages as a virus and want to avoid them; we believe investing in mortgages today with strong underwriting and appraisals wringing out the valuations are good investments. Still somewhat risky but with due diligence buying MBSs is not a virus; the biggest stumbling block is that the MBS market is still frozen lessening marketability of MBSs. 

Ben Bernanke and Paul Volcker were testifying this afternoon at the House Financial Services Committee on regulatory reform. Volker and Bernanke mostly on the same page except Bernanke wants the Fed to have complete regulatory authority of all banks while Volcker's idea is the Fed to regulate large banks and another agency to keep tabs on smaller banks. The dividing line is $50B in assets. One issue brought up was how the Fed let Lehman Bros fall through the cracks after running stress tests on the firm. Bernanke pointed out the Fed was not the regulator of Lehman, but on the failed stress tests it turned over the information to the SEC; after the barn burned down. Speaking of the SEC Congress should focus on that totally incompetent agency as well as drilling the rating agencies; the two deserve a huge amount of blame for the financial meltdown and the billions lost by investors and about sunk the global economies. Congress has a way to miss the big picture most of the time. Bernanke reiterated that demand for US bonds will remain strong.

A voice in the wilderness; David Stevens is backing the view that mortgage brokers are not dead and he sees brokers as a positive as long as they police themselves better.The changes in the Real Estate Settlement Procedures Act and the implementation of the SAFE Act mean that in the future there will be a viable mortgage broker industry that will grow in size again, declared Federal Housing Administration commissioner said. All along from every angle all I have heard in the last year is that brokers are gone; I never subscribed to it and apparently neither does the big dog at FHA. Keep the faith all you doom and gloomers, brokers have a purpose as long as they are professionals and knowledgeable----no more pizza delivery peole becoming loan donkeys over night.

Tomorrow weekly jobless claims at 8:30 are expected to have declined by 7K; also at 8:30 Feb consumer price index expected at +0.1% for both the overall and the core rate. This morning's PPI was positive for the inflation outlook but markets pay more attention to CPI. At 10:00 Feb leading economic indicator, expected up 0.1%. The March Philly Fed business index is also out at 10:00, expected to be at 18.0 frm 17.6 in Feb. Being a March number traders pay attention to it and its internal components (new orders, prices pd and employment).

Long term rates (10 yr note and mortgages) are moving slowly to re-test once again the low yields that have been a brick wall since late January. The 10 yr at 4:00 pm at 3.64%, the low is 3.58%. Technically it looks like that is the target traders are working toward.

PRICES @ 4:00 PM

10 yr note:                            99.29 +4/32 3.64% -1 BP

5 yr note:                              100.01 -1/32 2.36% +1 BP

2 Yr note:                              99.29 unch 0.91% unch

30 yr bond:                           100.31 +14/32 4.56% -3 BP

Libor Rates:                          1 mo 2.37%: 3 mo 0.266%; 6 mo 0.401%; 1 yr 0.859%

30 yr FNMA 4.5 Apr:             101.08 +6/32 (.18 bp) (+7/32 (.22 bp) frm 9:30)

15 yr FNMA 4.0 Apr:             102.01 +3/32 (.09 bp) (+4/32 (.12 bp) frm 9:30)

30 yr GNMA 4.5 Apr:            101.26 +6/32 (.18 b p) (+6/32 (.18 bp) frm 9:30)

15 yr GNMA 4.0 Apr:            102.23 +3/32 (.09 bp) (+5/32 (.15 bp) frm 9:30)

Dollar/Yen:                         90.25 +0.02 yen

Dollar/Euro:                        $1.3733 -$0.0036

Gold Apr:                             $1119.20 +$3.30

Crude Oil Apr:                      $82.68 +$0.98

Goldman-Sachs

Commodity Index:               532.20 +6.63

DJIA:                                   10733.67 +47.69          

NASDAQ:                             2389.09 +11.08

S&P 500:                             1166.21 +6.75