Rate markets opened soft this morning after the 10 yr note tested and failed at its 20 day moving average yesterday. At 8:30 the 10 yr -9/32, mtgs -6/32; the stock market got additional better than expected earnings reports this morning on more banks, but the key indexes at 8:30 were weaker. At 9:00 the DJIA -36, most markets in Europe also weaker this morning; the 10 yr at 9:00 -12/32, mtgs -7/32 (.21 bp). At 9:30 the DJIA opened better, the 10 yr note -13/32 and mortgage prices -7/32.

At 7:00 this morning the weekly MBA mortgage applications data; very weak. Applications declined 13.7% last week; purchase applications were down 16.7% while re-finance applications were down 16.8% frm the previous week. 65% of all apps last week were for re-finances, down frm 67.3% last week. The four week moving average for the seasonally adjusted Market Index is down 1.0%. The average contract interest rate for 30-year fixed-rate mortgages increased to 5.07% from 5.02%, with points increasing to 1.13 from 1.11 (including the origination fee) for 80% LTV loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 4.51% from 4.44%, with points decreasing to 0.96 from 1.04 (including the origination fee) for 80% loans. The average contract interest rate for one-year ARMs increased to 6.86% from 6.71%, with points decreasing to 0.31 from 0.32 (including the origination fee) for 80% LTV loans.

At 2:00 this afternoon the Fed will release its Beige Book, the Fed's detailed economic report from each of the 12 Fed districts. Generally more specifics on each region in the Beige Book about employment housing, and consumer spending than what we see in national reports.

Talk continues around the world from central bankers that tightening and taking away the government punch bowls is getting closer. The Bank of England Governor Mervyn King wrote in Scotland’s Herald newspaper “it would be wise” to take into account the prospect of higher borrowing costs. Yesterday Janet Yellen, San Francisco Fed Pres said yesterday that the ability to tighten at the right time should not be in doubt. Unlikely tightening will occur anytime soon but even in China there is growing concern that its government has to begin weaning the economy off government stimulus. The point to keep in mind; unless the economies roll back into a double dip recession (and that doesn't appear likely), the decline in interest rates triggered by financial system panic is over and the path for rates is likely up rather than lower. The rate markets will not wait for tightening to occur, they will, and are already taking it into account, well in advance of any actual moves.

Huge pressure increasing on Obama to extend the first time homebuyers tax credit. Today a full page ad in the NY Times from NAR and NAHB to extend it. We fully expect it will be extended, if not Obama will take heavy hit as will the Democrats, and of course that isn't what politicians like to do.

Will the Fed continue to buy MBSs after it fulfills its $1.2T commitment at the end of March next year? Look for that to become a big issue later this year and into 2010. The MBS markets are still not functioning and need the Fed or another equivalent plan to keep mortgage markets from huge rate increases that would put a real hurdle into the economic recovery that most are betting on now.

PRICES @ 10:10 AM

10 yr note: 101.25 -18/32 3.41% +7 BP

5 yr note: 100.03 -9/32 2.35% +6 BP

2 Yr note: 100.02 -2/32 0.96% +4 BP

30 yr bond: 104.18 -32/32 4.23% +6 BP

Libor Rates: 1 mo 0.243%; 3 mo 0.283%; 6 mo 0.585%; 1 yr 1.227%

30 yr FNMA 4.5 Nov: @9:30 100.21 -8/32 (.25 bp) (-13/32 (.40 bp) frm 9:30 yesterday)

15 yr FNMA 4.0 Nov: @9:30 101.09 -6/32 (.18 bp) (-9/32 (.28 bp) frm 9:30 yesterday)

30 yr GNMA 4.5 Nov: @9:30 100.26 -9/32 (.28 bp) (-16/32 (.50 bp) frm 9:30 yesterday)

15 yr GNMA 4.0 Nov: @9:30 101.30 -7/32 (.21 bp) (-11/32 (.34 bp) frm 9:30 yesterday)

Dollar/Yen: 91.11 +0.60 yen

Dollar/Euro: $1.4989 +$0.0060 (dollar weaker)

Gold Dec: $1055.30 -$3.30

Crude Oil Dec: $78.95 -$0.17

Goldman-Sachs

Commodity Index: 512.63 +0.40

DJIA: 10096.88 +55.40

NASDAQ: 2184.93 +21.49

S&P 500: 1098.91 +7.85