The Week Ahead in the Capital Markets  --   May 27, 2009 The Obama put is facing its first test.  Can it hold?  Will it keep mortgage rates low?  The Federal Reserve is doing all it can.  Purchases of mortgage-backed securities have taken the Fed’s mortgage holdings above $350 billion.  The spread between mortgage and Treasury yields held below 2.00% while Treasury yields soared, but today the spread gapped wider by – gasp! – 0.30%.  It closed at 2.30%, its widest level in months. All it took was a little Treasury debt auction, and market psychology turned on a dime.  All of a sudden, traders fear that Treasury debt won’t be absorbed, China will snub U.S. offerings, and inflation will rear its ugly head.  Fear sent mortgages plummeting, down more than a full point today. Treasury yields leaped in recent weeks – up 0.61% on the ten-year Treasury in the past week alone.  Warren Buffett wrote in Berkshire's annual letter in February that when “the financial history of this decade is written...the Treasury-bond bubble of late 2008” may rank up there with the housing bubble of the middle part of the decade. Pimco's chief investment officer, Mohamed El-Erian, was blunt at year's end, saying, “Get out of Treasuries. They're very, very expensive.”  Treasuries have lost their appeal. It's no secret that the U.S. budget deficit is exploding from the combination of weak tax receipts and sharply increased spending. Yields are very low by historical standards, the government is issuing huge amounts of debt to fund record budget deficits, and the massive federal stimulus program ultimately may lead to much higher inflation.  The government-bond glut is hardly confined to America. Combined issuance in the U.S., Europe, Japan, Canada and Australia could come to $4.2 trillion this year. The yield curve steepens daily, stretching the difference between short- and long-term yields. Sure the 10-year Treasury could hit 5.5%, but not any time soon.  Morgan Stanley thinks that Treasury rates won’t shoot the moon, and we agree.  Plenty of deflation, weak demand, and slow global growth is in front of us.   The economy is turning the corner, but very slowly.  The Federal Reserve is working through a program to buy $300 billion of government debt through the end of September. It has already purchased more than $100 billion. The Fed also has a program to buy $1.25 trillion of agency mortgage securities as part of an effort to depress mortgage rates.  Don’t fight the Fed – rates could very likely come back down. Happy Memorial Day, everybody. As you know, the banks were all closed today. And tomorrow, surprisingly, some of them may actually reopen. – Jay Leno Thanks for your business and have a good week.            -- Tom Millon About Capital Markets Cooperative Capital Markets Cooperative (CMC) provides mortgage bankers with the economies of scale and the expertise to reduce risk and maximize profit in the secondary market. Regarded as the premiere secondary marketing specialist in the industry, CMC has worked with financial institutions nationwide to break traditional barriers in capital markets and take performance and profits to the next level. To date, CMC executives have managed more than $500 billion of mortgage volume.   For more information about Capital Markets Cooperative, visit www.capmkts.org or call 904.543.0052 or e-mail [email protected].