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Good Morning,

On Monday, mortgages leaked 6 to 8 ticks wider to swaps - a continuation of their recent widening trend. Origination was high at 2.5 bln to 3.0 bln but was met by good buying, mostly from the Fed. The market might be getting a little concerned with the temporary nature of Fed buying, which has only been promised for the first two quarters of this year. Speculation that the market may be overbought could be weakening support for mortgages at these prices. At the end of the day the FNCI 4.0 was -1/32 at 102-1 and the FNCL 4.5 was -2/32 at 102-06.

The headlines today will focus on the most recent survey of economists which predicts annual domestic growth of -1.5% this year and a global recession. We can expect stocks to have another tough day on that news, with the only bright spot in sight being a pending stimulus package which seems to be gaining momentum. This morning stock futures are down already - Dow futures are -40 points. The only notable economic report today will be the US trade balance report for November. The US trade balance is expected to decline -$51 billion and would then reach its lowest level in 4 years. Falling oil prices have had the biggest effect on this number, but slowing economies at home and abroad should add a bit of volatility to the report going forward. Bernanke will speak at the London School of Economics today and investors will be looking for a clear picture of the Fed's strategy in this crisis. The Fed might be considering expanding their asset purchase program to include notes and bonds.

GN supply was pretty heavy yesterday and international accounts, who usually are its biggest buyers, were on the sidelines which caused GN/FN spread to tighten. Premium GNs are trading back of FNs because had some larger prepayments reported last month. GN 6.5 are trading -14 of FNs. MJMs have experienced incredible tightening recently due to a lack of supply, 5.0s are trading -26/32s versus GN1s and only two months ago were trading -70/32s of GN1s.

Yesterday, the equity markets continued to sag, ahead of expectedly recessionary economic reports this week. The Dow was -125.21, the NASDAQ -32.80, and the S&P -20.09. With oil remaining at depressed prices and no good news in sight for equity markets, investors have turned their attention and their money back to the relative safety found in treasury markets. At the end of the day the 2yr was +1.25/32 at 0.747 and the 10yrs was +30.5/32 at 2.304.

Good Morning…

Yesterday, Construction Spending for November was reported at -.6% versus an expected decline of 1.4% and October’s results were revised to -.4% from -1.2%. Residential construction continued to provide a big drag while non-residential spending showed a slight increase. The big driver in spending was government construction which should only get larger in the coming months and quarters as the Obama Administration puts into play its economic stimulus plans.

Separately, as President-elect Obama spent his first day in Washington, details of his economic plan are beginning to leak out. At the moment it looks like the President-elect prefers a plan in the $800 billion range, with about 40% of that number in the form of tax relief. There have been numerous comments suggesting that significant infrastructure building programs will be put into place to rebuild roads and bridges, possibly update the nation’s power grid and create jobs. Also, financial aid will most likely expand beyond financial institutions and auto producers to states and other municipalities.

On Monday, the Fed’s actions in MBS space were widely broadcast as they came in and purchased good size across the 30yr coupon stack. It was noted by dealers that some purchases centered on FNCL 6%, Gold 4.0% and 4.5% and GNMA 4.5%. Fannie MBS traded well throughout the day with 3pm closing prices showing January FNCL 30yrs at 99-30 for 4.0%, 101-15+ for 4.5%, 102-13 for 5.0% and 102-27 for 5.5s. With $500b to spend over the coming quarters, it’s anticipated that the Fed will be very active, keeping mortgages well bid and investors engaged as they try to stay ahead of the Fed. Origination flows were on the lighter side with hedging activity predominantly in FNCL 4s and 4.5s across months. The next settlement for agency MBS is January 13th, therefore we’re anticipating a pickup in specified sales, dollar rolls and coupon swap this week.

Today’s economic releases begin at 10 am with the ISM non-manufacturing composite (Dec) expected to decline to 36.5 from November’s 37.3 post. Factory Orders (Nov) follow with an expected decline of 2.3%, an improvement from the -5.1% drop in October. Pending Home Sales rounds out the 10 am releases, not surprisingly a decline of 1% is forecast. Later in the day, the Fed releases its minutes from the December 16th FOMC meeting.

This morning mortgages are opening relatively unchanged with FNCL 4s at 100-03, 4.5s at 101-16+ and 5s at 102-14. Treasuries show the 2yr at .80% (-02+/32), the 5yr at 1.69% (-01+/32), and the 10yr at 2.49% (-04/32).

Economic Calendar: