10/13/09

Good morning. After the heavy selling on Thursday and Friday last week treasuries and mortgages are starting better this morning. As noted in Friday's report we expect increased market volatility this week; the reversal and heavy selling last week purged a lot of bullishness as interest rates finally hit their low yields. The trigger last Thursday was the weak demand for the 30 yr bond auction, comments from various Fed officials that the Fed was preparing to drain bank reserves with reverse repos, Australia increasing its base rates, and the exploding federal deficits driven by the mostly wasted bailout money. Mortgage rates fell below 5% a week ago, but they too will likely find it difficult to decline more. Regardless of the arguments either side of the rate debate; there is a limit that rates cannot exceed, we believe we have hit those limits as long as there is no major change in sentiment on the economic outlook. If you are “on the fence” you might want to consider making a move.