Market commentary

The U.S. economic calendar is blank today, however, news regarding FNMA and FHLMC, another rate hike in China, and the U.S. Treasury’s auction of $32 billion of 3 notes are all effecting the bond market today.

For the second time in a just over a month China has raised interest rates in an attempt to cool down inflation, projected to be over 5% for January and to reign in the problematic real estate bubble.

We are also seeing MBS under perform the Treasury market, which in my opinion is a result of next week’s Treasury Department announcement on the overhaul of Fannie Mae and Freddie Mac. It is rumored the Treasury’s plan calls for a reduction in the government’s share of the U.S. mortgage market from the current 95% to less than 50%. In addition, Treasury is expected to propose reducing the maximum size for mortgages guaranteed by the government to $625,500 from the current $729,000 in high cost markets.

And finally, the bond market is waiting to see how much demand is out there for the $32 billion of 3 year notes that will be auctioned this afternoon.

Mortgage bonds have given back all of Monday afternoon’s gains---you should have taken advantage of that while we had it.