S&P and the economy, Hello is somebody sleeping?

Debt issuance may increase further after bond trading firms this week predicted the budget shortfall will more than double to $988 billion in 2009.

The Bush administration's most recent budget forecast, issued in July, projected a $482 billion deficit for the 2009 fiscal year, which started Oct. 1. Since then, the government has taken over mortgage companies Fannie Mae and Freddie Mac, intervened to save insurance company American International Group Inc., and embarked on the bank rescue program. As a result, borrowing needs are expected to rise to a record $550 billion in the three months to Dec. 31, the Treasury said Nov. 3. That follows a $530 billion record in the July to September quarter. California embraced municipal debt as they approved about $39.7 billion of new borrowing, representing about 83 percent of measures for which results were available. Californians approved at least $27 billion, including money for schools and loans to veterans.

Voters in 41 states from Rhode Island to Alaska considered $66.4 billion of bond proposals yesterday, the second-biggest slate after November 2006's $78.6 billion, according to Ipreo, a New York-based financial data provider. The measures sought the largest amount of new borrowing during a presidential election.

Fannie and Freddie moving market, bonds, oil

Fannie Mae and Freddie Mac tumbled in New York trading to the lowest valuations since at least 1990 as speculation increased that the U.S. Treasury will bail out the mortgage-finance companies, wiping out shareholders. Fannie, based in Washington, slumped as much as 20 percent and McLean, Virginia-based Freddie dropped as much as 32 percent, extending its losses to 90 percent for the year. Rising borrowing costs and evidence that demand for their debt was waning last month led Treasury Secretary Henry Paulson to seek the authority to pump unlimited amounts of capital in Fannie and Freddie in an emergency. Freddie paid its highest yields on record in a debt sale yesterday amid concern that credit losses are depleting the capital of the beleaguered mortgage-finance companies.

Fannie and Freddie have $223 billion of bonds due by the end of the quarter and their success in rolling over that debt may determine whether they can avoid a federal bailout. Fannie has about $120 billion of debt maturing through Sept. 30, while Freddie has $103 billion.
Treasuries rose after a report that Freddie Mac will meet with government officials, fueling concern a takeover of the mortgage-finance provider is imminent and leading investors to the safety of government debt.

Oil prices began creeping upward this morning, but a government report that reflected a surprising increase in crude supply stalled the oil rally and allowed The Dow to climb as much as 80 points before falling back. Treasuries are steady with the 10 Year yielding 3.80%.

Treasuries, Bonds and bail out.

Treasuries fell as Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank should raise interest rates ``sooner rather than later'' and traders prepared for the sale of $58 billion in government debt this week.
Treasury Secretary Henry Paulson's plan to revive U.S. mortgage financing depends on investors buying the same kind of bonds they're shunning in Europe. Paulson wants to create a version of Europe's market for covered bonds in the U.S. just as sales of the debt have fallen to a six-month low and prices have dropped 2.5 percent this year. While the securities are backed by loans and bank assets to get AAA ratings, most are valued, on average, as if they were three levels lower. As I have mentioned before the insurers for these bonds are ll going under. This could be our next crisis.

Developing a U.S. market for the securities is the latest of Paulson's initiatives to revive lending among banks crippled by $452 billion of credit losses and writedowns. His plan for a ``SuperSIV'' to bail out the $400 billion market for structured investment vehicles(What planet is our government from?) failed last year after Wall Street firms rescued the credit funds independently. Both Democratic and Republican senators are looking for changes in the Treasury secretary's proposal this month to shore up home lending by allowing the government to buy stakes in Fannie Mae and Freddie Mac.

European Central Bank raises rates ahead of Fed

Treasury 10-year notes rose after the National Association of Purchasing Management-Milwaukee manufacturing index dropped to its lowest since October 2001 and stocks of several financial firms fell.

Citigroup Inc., Merrill Lynch & Co. and Lehman Brothers Holdings Inc. were among the firms that declined. The purchasing association's monthly index of regional manufacturing fell to 39, its fourth straight month below 50. A reading lower than 50 means the number of manufacturers that said business deteriorated was greater than the number saying it improved.
Treasuries earlier fell, extending the biggest quarterly decline since 2004, as inflation in the euro region rose to the highest in 16 years and oil advanced above $143 a barrel.
The retreat pushed 10-year yields up from a three-week low after a European Union report showed the rate of euro-region inflation climbed to 4 percent, bolstering the case for the European Central Bank to raise rates. Why are they ahead of us?

Crude oil for August delivery rose as much as $3.46, or 2.5 percent, to $143.67 a barrel in electronic trading on the New York Mercantile Exchange. It reached $142.99 a barrel on June 27 after the Fed left interest rates unchanged at 2 percent. The market continues to struggle with what to do with the rise in oil.

Fed cut, Europe to head into recession.

Treasuries rose as home prices fell the most on record and U.S. consumer confidence sank, bolstering speculation the Federal Reserve will cut its benchmark interest rate tomorrow and keep it low for longer than anticipated. Government debt began gaining earlier after Deutsche Bank AG, Germany's biggest bank, reported its first quarterly loss in five years, underscoring concern financial institutions worldwide face additional losses linked to the U.S. subprime mortgage market.

The credit crisis is far from being over. The market's telling you the Fed's going to 2 percent tomorrow and will say in the statement they'll be in a sit-and-watch mode. The weak-economy type talk is pro-bonds. Today's home-price report is a reminder that the economy remains weak and housing has been a disaster, and we probably haven't seen a bottom in it yet.
Other reports this week will show the economy hardly grew in the first quarter and employers cut jobs in April for a fourth month, surveys forecast. Frankfurt-based Deutsche Bank, Germany's biggest bank, reported a quarterly loss after writing down the value of loans for leveraged buyouts and asset-backed securities by 2.7 billion euros ($4.2 billion). Europe is next, England will probably be kicking the recession off over there.


Futures contracts on the Chicago Board of Trade show an 84 percent chance the Fed will trim its target for overnight lending between banks by a quarter-percentage point to 2 percent tomorrow, compared with a 78 percent likelihood yesterday. The balance of the bets is for no change in borrowing costs. Traders also see a slimmer chance the Fed will start lifting rates later this year. The likelihood of an increase to 2.5 percent at Fed meetings in September, October and December declined today, futures show.

Fear is resceding is the bull back?

U.S. Treasury notes fell, pushing yields to the highest since February, as traders speculated the Federal Reserve will stop cutting interest rates after this month.

Fear is receding. People are looking at where fed funds is going to be, maybe settling in at 2 percent, and saying do we really want to own two-year notes at 1.5 percent if things are settling, if there's less risk to the system. Traders added to bets the Fed will cut its target rate by just a quarter-point to 2 percent on April 30. Futures on the Chicago Board of Trade show a 76 percent chance of that size reduction, up from 58 percent a week ago. The rest of the bets are on a half-point cut. Traders now see a better-than-even chance the rate will stay at 2 percent through next quarter.

Swap spreads widened amid the increase in Libor rates, which typically signals a decline in risk appetite. The spread between Treasury yields and the rate on a two-year interest-rate swap, used to hedge against interest-rate swings, reached as wide as 101.88 basis points, from 96.25 yesterday. Rising swap rates can lead investors who are receiving fixed payments to sell Treasuries to hedge the risk that rates will rise.

Bond prices down

Bernanke told the Joint Economic Committee of Congress last week that the Fed's actions ``will help to promote growth over time and to mitigate the risks to economic activity.''

The bond market is looking much like it did in December, when yields rose as much as 0.27 percentage point to 3.91 percent on average. The increase followed the Fed's Dec. 11 decision to cut its target for overnight loans between banks to 4.25 percent.

The slump in Treasuries since the bailout of Bear Stearns was interrupted on April 4 after the Labor Department said company payrolls contracted by the most in five years during March. At the same time, wages grew at the slowest pace since 2005, bolstering speculation that inflation will decline as Bernanke said it would.

The April 4 rally wasn't enough to keep Treasuries from declining last week. Two-year note yields climbed 17 basis points to 1.81 percent, and are up from 1.24 percent on March 17, the lowest since July 2003.

Treasuries were little changed with two-year note yields near the lowest in almost four years deterring investors and Federal Reserve officials indicating the U.S. economy remains under pressure from the housing slowdown, credit debt, bonds and bond insurers.

Fed Chairman Ben S. Bernanke urged lenders to forgive portions of mortgages for more borrowers whose home values have declined, and Vice Chairman Donald Kohn said U.S. banks face ``challenging market conditions.'' Bernanke, in remarks at a conference in Orlando, Florida, said more must be done to stem foreclosures. ``Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,'' he said. ``Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.''

In a sign the U.S. economic slowdown is spreading, the Bank of Canada cut its benchmark lending rate by a half-percentage point and signaled it will have to act again to offset a slump in exports to the U.S. The slowdown in the U.S. is beginning to have a greater effect on the rest of the world. Citigroup Inc., the biggest U.S. bank, may need additional capital from outside investors as losses stemming from the collapse of the U.S. subprime mortgage market increase.

First it will hit America/Canada, next will be Britan then Europe. Expect to see new high against the dollar across the board.

$4.20 a gallon gas could be coming for this summer.

We shall see.

Treasuries rose, with three-month bill rates dropping to the lowest since 2004, as reports showed the economy's fourth-quarter growth was less than forecast and first-time claims for jobless benefits increased last week.

U.S. government debt also advanced as stocks declined and phone company Sprint Nextel Corp. and mortgage financier Freddie Mac said they lost almost $32 billion last quarter. Federal Reserve Chairman Ben S. Bernanke told a Senate committee today that it's ``fair'' to say the bank has a tougher time responding to the current slowdown compared with the recession of 2001. Initial jobless claims increased by 19,000 to 373,000 in the week ended Feb. 23, from a revised 354,000 a week earlier that was higher than previously reported.


Traders increased bets that the central bank will reduce the target rate for overnight lending between banks by more than a half-percentage point next month. Bernanke signaled he's ready to lower interest rates again in testimony to a Senate panel today. Ten-year note yields may fall to 3.55 percent by the end of June with the most recent forecasts given the heaviest weighting. Two-year yields may rise to 2.06 percent, from 1.86 percent today.


Freddie Mac, the second-largest mortgage-finance company, posted a record $2.45 billion fourth- quarter loss as rising defaults sent credit costs soaring. Freddie Mac, which buys and guarantees home loans, had predicted the results would be similar to the third-quarter's $2 billion loss.

This week's economic news.

The yield on the 10-yr is up to 3.86%, and mortgage prices are worse by .250-.375. The only news due out today is the February NAHB housing market index, expected to be unchanged at 19. It measures the general state of the single family home market, and a reading above 50 signals a "good" outlook while a reading below 50 signals a "poor" outlook - it has been below 50 for almost two years. Tomorrow we have the release of the FOMC minutes from the Jan 29/30 meeting, along with the January Consumer Price Index report and Housing Starts. The CPI is expected +0.3% in the overall index and +0.2% in the more important core data. Lastly on Thursday we'll see the Leading Economic Indicators (LEI) report for January. It is an attempt to predict economic activity over the next 3-6 months, and is expected to show a 0.1% decline, meaning that economic activity may slow slightly in the near future.