Intraday volatility in the financial markets was the most volatile in weeks. The stock market rolled over this afternoon with selling right into the close. The 10 yr held its support but is still confined in an 8 basis point range; mortgage prices rallied after selling at mid-day. Suggest holding rate locks overnight, stocks look vulnerable for the moment.

High volatility today in the rate and stock markets; treasuries were under pressure after the 5 yr note auction had a higher yield than what was expected pushing the 10 yr down 18/32 at one point with its yield jumping to 3.52% for a very short time. Mortgage prices at 2:00 were down 16/32 on the day. At 2:15 the FOMC statement was released and flipped the markets hard; the 10 rallied from -18/32 to +11/32, the yield dropped from 3.52% to 3.41% and mortgage prices from -16/32 to +6/32. Most lenders held the line on the early afternoon selling, and also didn’t bite on the knee jerk rally on the statement. The DJIA jumped to +80 on the statement, but also fell back to close on the lows of day—-buy the rumor, sell the fact?

The FOMC statement had little new in it as far as we saw other than a reaffirmation that the Fed would likely keep rates low for a long time as the economic outlook, while improving isn’t likely to grow much with unemployment high and home price wealth lost. Nothing really new in the statement, just confirmation rates are likely not about to increase much. The 10 yr once again has held its support at 3.50% on a closing basis. While treasuries were volatile today, mortgage prices were even more so. The statement in its entirety follows.

FOMC Policy Statement: Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn.  Conditions in financial markets have improved further, and activity in the housing sector has increased.  Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.  Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.  Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.

The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.  The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.  The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. (end)

The $43B 5 yr drew 2.470% with a 2.40 cover and an indirect bidder take of 44.8%. This is against the 2.435% to 2.460% anticipated yield in the WI trade this morning and an average over the ’09 auctions of 2.22 and 43.1%.

Tomorrow markets finally have data to think about. Weekly jobless claims at 8:30 are expected to increase by 5K to 550K, continuing claims down to 6.195 mil frm 6.23 mil the previous week.At 10:00 August existing home sales are expected to be +2.0% to 5.35 mil units annualized.

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