Treasuries and mortgages opened weaker this morning with little new developments in the Mid-East. After weeks of increasing protests from citizens in many Mid-East countries last night it was relatively quiet. As we noted previously, interest rate markets are increasingly concerned about the increasing strength of the economy and now after Jan PPI and CPI the worries over inflation have momentarily increased. Without safety moves into treasuries lead by the what is happening in the Mid-East the bond market will re-focus on domestic economic conditions and the potential that producers and businesses will begin to increase prices after absorbing them for months. At some point the increases in commodities will have to be passed on to consumers; we believe we are getting closer each day.

If price increases begin to surface to consumers it will likely begin in food prices, most every food commodities have increased dramatically. While the Fed continues to focus only on inflation that excludes food and energy as its gauge of inflation, and discounts much of the increases in commodities, sooner rather than later prices across the spectrum will begin to increase. Prices of non-food commodities are increasing as well; aluminum, copper, platinum, silver, oil, all have seen huge price increase as well. Once manufacturers and businesses can no longer absorb input price increases, and they are coming close, the fears of inflation will quickly rise. With interest rates as low as they are it won't take much to open the flood gates. Food prices in some areas are already being passed on in the form of lesser quantities for the same money.

There are no economic releases scheduled today, and Monday is a holiday for the bond and mortgage markets (President's Day). Looking ahead; next week Treasury is back to borrowing, Jan existing and new home sales lead the headlines. On Tuesday Treasury will auction $35B of 2 yr notes, Wednesday $35B of 5 yr notes and Thursday $29B of 7 yr notes. The total at $99B is the same as last month and the same since last Oct. As long as there is quiet in the Mid-East the bond and mortgage markets will not likely improve much and more likely see some pressure within what we now believe is a new range; basis the 10 yr note between 3.75% and 3.50%.

...."The Federal Reserve is committed to its long-standing practice of ensuring that all of its rulemakings are conducted in a fair, open, and transparent manner. Accordingly, we are disclosing on our public website summaries of all communications with members of the public--including banks, trade associations, consumer groups, and academics--regarding matters subject to a proposed or potential future rulemaking under the act....." Bernanke before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate yesterday. Bull! The Fed is completely ignoring the mortgage broker industry, trying to dictate how originators are paid with little or no regard to the impact on professional mortgage originators that don't want to work for a bank....socialism from the Fed. Bernanke says the right things but doesn't actually back it up. Non-bank mortgage lenders are ignored in favor of those large banks that the Fed and Comptroller of the Currency regulate. Bernanke knows full well where most of the blame lies for the sub prime crisis that almost collapsed global economies.

....."The preferences of foreign investors for highly rated U.S. assets, together with similar preferences by many domestic investors, had a number of implications, including for the relative yields on such assets. Importantly, though, the preference by so many investors for perceived safety created strong incentives for U.S. financial engineers to develop investment products that "transformed" risky loans into highly rated securities. Remarkably, even though a large share of new U.S. mortgages during the housing boom were of weak credit quality, financial engineering resulted in the overwhelming share of private-label mortgage-related securities being rated AAA. The underlying contradiction was, of course, ultimately exposed, at great cost to financial stability and the global economy....."  Ben Bernanke at the Banque de France Financial Stability Review Launch Event, Paris, France this morning. The Fed will admit the sub-prime mortgage disaster was primarily the responsibility of Wall Street but still is trying to lay much of it on mortgage originators with its attempt to rule how LOs are compensated, aligning itself with the large banks that are dead set on taking control of all mortgage lending that will without any doubt cost consumers more.  

courtesy - www.tbwsratealert.com



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