Mortgages had a lackluster trading session yesterday with prices closing modestly lower. The up in coupon was the trade of the day after reports indicated that the President Obama’s mortgage rescue plan may face delays.

Higher coupons outperformed on the news that the refi wave may be delayed(slower pre-pays of premium bonds). Origination volume was on par with Tuesday’s level of about $2.5bln. Mortgages spent most of the day slightly wider to swaps but finished strong on increased Fed purchases in the afternoon. Despite renewed GN interest out of Asia, the GN/FN swap remained mostly unchanged. On the day, the FNCL 4.0 Mar closed -12/32 (98-27), the FNCL 4.5 Mar was -4/32 (100-24+), and the FNCI 4.0 Mar was -3.5/32 (100-19).

The equity markets chose to focus on Fed Chairman Bernanke’s testimony yesterday, in which he indicated that banks don’t necessarily need to be nationalized. Stocks put in a strong performance despite a slew of overwhelmingly negative economic releases. Bargain shoppers emerged to buy stocks at values not seen in almost two decades. Meanwhile, yesterday’s economic reports showed that U.S. consumer confidence plummeted in December and home value depreciation has accelerated. The S&P/CaseShiller US home price index showed an 18.55% decrease on a y/y basis and consumer confidence dropped to 25 versus estimates of 35. Both results are record lows and indicate that the economic recession is likely deepening. After spending the morning in positive territory, Treasuries grinded lower in the afternoon and finished the day modestly lower. On the day, the 2yr was -1.25/32 (0.977), the 5yr was -6.5/32 (1.877), and the 10yr was -6/32 (2.801).



This morning, treasuries are mostly unchanged ahead of the next round of housing data. Today’s Jan US existing homes sales report is actually predicted to show a small 1.1% increase to 4.8 mln. This would add to December’s rebound of +6.5%. While an increase is welcomed news, the enthusiasm will be tempered by the knowledge that much lower prices are the driving force behind these sales increases. The current supply of homes of 8.7 months is still about double the normal levels of 4.5 months but down from the 23-yr high of 11-months reported in June of last year. Also in the news today, the latest MBA mortgage applications index showed a -15.1% dip in applications. Refinancing activity dropped 19.1% while purchase slid 2.6%. Lastly, the market will be focusing on day two of Fed Chairman Bernanke’s testimony before Congress and will also be watching today’s $32 bln 5-yr T-note auction