Mortgage backed securities (MBS) prices are higher (rates lower) after yesterday’s volatile trading over the FOMC policy statement and before today’s Treasury auction of $27 billion in 7yr notes that completes the record $104 billion in borrowing. The Fed, encouraged by signs the recession is easing, doused speculation they will pump more money into the economy. Fed policy makers will maintain the size and pace of their program to buy Treasuries, agency debt and MBS. The statement indicated more time is needed to assess the prospects for a recovery before deciding to exit from their unprecedented credit programs and reinforced expectations that interest rates will remain low for some time. Also emphasized was continued monetary stimulus is needed but the risk of inflation is low, easing concern that higher prices will erode the value of the fixed payments from debt. The difference between 10yr note yields and Treasury Inflation Protected Securities (TIPS), which reflect the outlook among traders for consumer prices, narrowed to 183bps from 202bps two weeks ago. The final revision to 1st quarter Gross Domestic Product (GDP), the sum of all goods and services produced, came in at -5.5% reflecting declines in inventories, housing and business spending and capping the worst six month performance in almost sixty years. Residential construction dropped 39%, the most since 1980. Business investment shrank 37%, the biggest decline since 1947. Inventories fell $87 billion, the biggest drop ever. On a positive note, the trade deficit narrowed contributing 2.4% to growth, while core PCE rose only 1.6%. Personal Consumption Expenditure is the Fed’s preferred measure of inflation. Jobless claims unexpectedly rose for a second straight week, 15K to 627K from a revised 4K higher 612K indicating the labor market may take longer to stabilize. The data included unexpected claims from the educational services sector which often shows variability at the end of the school year. The 4 week moving average also increased to 617,250 from 616,750. The total number of people collecting unemployment insurence jumped 29K to 6.74 million. Fed Chairman Bernanke is testifying today before the House Committee on Oversight and Government Reform regarding his role in Bank of America’s purchase of Merrill Lynch.
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