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Bonds fall as mortgage limits are lifted

February 28, 2008 | "Associated Press"

Treasurys fall as regulators say they will lift limits on investment portfolios for Fannie Mae and Freddie Mac, a step toward easing the credit crisis.

Treasury prices fell Wednesday after regulators said they will lift limits on the investment portfolios for mortgage companies Fannie Mae and Freddie Mac, a move expected to bring new capital into the ailing housing market.

The higher investment caps for the two companies, seen as a step toward an easing of the credit crisis, overshadowed a warning from Federal Reserve Chairman Ben Bernanke to Congress that the economy is grappling with the triple stresses of strained financial markets, inflation and economic slowing.

The regulatory change should free up billions of dollars that the mortgage finance companies could then use to rejuvenate the badly wounded housing sector. "These are measures that will help bring down the default rate" in mortgages, said Tom di Galoma, head of Treasurys trading at Jefferies & Co.

The Office of Federal Housing Enterprise Oversight said it would put the higher caps in place on March 1.

The housing market's problems in the past year have contributed to a vigorous Treasury rally, but the signs of new relief on Wednesday diminished demand for these safe assets.

The benchmark 10-year Treasury note fell 3/32 to 96 29/32 with a yield of 3.88%, up from 3.86% late Tuesday, according to BGCantor Market Data. Prices and yields trade in opposite directions.

The 30-year long bond fell 22/32 to 94 29/32 with a yield of 4.70%, up from 4.66% the day before.

The 2-year note was flat at 100 7/32 with a 2.01% yield, unchanged from late Tuesday.

Separately, Bernanke warned lawmakers that inflation risks have risen since the start of the year, but also seemed to hint that more interest rate cuts are on the way by asserting that risks to growth currently trump inflation worries.
Investors had been on the alert for signals as to whether the Fed is more concerned about the sagging economy or the risk of inflation. That's because the Fed must choose whether to keep cutting rates to stimulate the economy, or halt rate reductions to cool inflation.

Bernanke Wednesday, at least in his prepared text, appeared to be solidly in the camp that is most worried about the faltering economy.

The Fed's next monetary policy meeting is on March 18. Pricing of federal funds futures contracts Wednesday showed that investors expect a 0.5 percentage reduction in the Fed funds rate soon.
Numerous new records set for commodities prices in recent weeks have contributed to the anxiety in the bond market about inflation spiraling out of control. And there were new records set again on Wednesday, as commodities demand was spurred by a dollar plunge that sent the euro above $1.50 for the first time.

In London, gold futures, which often rally on dollar weakness, set a new high of $961.30 an ounce. And oil prices broke above a new intraday of $102 a barrel in Singapore, although they later gave back some of their advance in New York trade.
Wednesday's data reports reinforced Bernanke's other unpleasant truth, that the economy definitely is weakening.

The Commerce Department reported durable goods orders dropped 5.3% in January, exceeding the forecast of Thomson/IFR analysts. January orders for transportation goods plunged 13.4%.

Separately, the department reported that sales of new homes fell by 2.8% in January to just 588,000, below the 600,000 sales forecast by Thomson/IFR and beneath the 604,000 homes sold in December.

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