Good Morning...

Treasury prices are under fire again this morning - the Treasury is set to kick off a $40bln auction of 2yr notes today, followed by a $24bln auction of 5yr notes on Wednesday and a $24bln 7yr note auction on Thursday. If you couple that supply with the recent rally in the equity markets, it becomes hard to see how treasuries might rally from here. Today's economic reports, House Price Index MoM and Richmond Fed Manufacturing Index (see table below for values), are expected to continue the delivery of bad economic news. However it is important to note that both reports are expected to remain slightly above their recent record lows perhaps indicating they may have found at least a temporary floor.

Yesterday, mortgage action was a combination of originator selling and Fed buying in the morning with a little purchase interest from Asia. Real money buyers of mortgages sold lower coupons and purchased higher coupons ("moving up in coupon") and there was notable profit taking from fast money accounts. Origination was just shy of $3bln on the day. MBS were at the wides of the day at 3pm as origination continued to leak in with little buying on the other side. MBS closed 3/32nds wider to swaps.

Treasury Toxic Asset Plan: One of the most innovative tenants to the Treasury's new plan is the idea of public/private toxic asset investments. The simplified explanation goes as follows: to purchase a toxic asset that costs $100, the private investor must contribute $7, which will be matched by a $7 investment from the government, and the remaining $86 will be secured by the investor in the form of an FDIC insured loan. Private investors will bid competitively on toxic assets which should produce a fair market price albeit certainly less than the 100 used in this example. Their are rumors that the government will even lean on reluctant banks to sell these assets at those prices in order to achieve the greater good - repairing domestic credit markets. Critics of the plan are still waiting to see if its actual execution proves to be the economic thaumaturgy its creators have promised.