“Suppose They Gave a War and Nobody Came” was a 1970 movie with Ernest Borgnine and Tony Curtis (both of whom are still with us). What if the Treasury gave an auction and nobody bid, aside from Primary Dealers who must bid? That is one of the fears that drove prices down and rates up yesterday, especially with the news that China fell behind Japan to become the second-biggest holder of US Treasuries. That is not a good thing, and is an indication that the Chinese have been acting on recent complaints about US policy by unloading US debt. China was a net seller of Treasuries by $34 billion, bringing its total holdings down to $755 billion from $790 billion in November. Money talks.

Treasury prices went south yesterday after this China news came out, the positive data on the housing market, and the apparent progress on Grecian debt (Treasuries don’t need to be the “safe haven”). More important than numbers reflecting last month’s economic climate, however, were the Fed minutes. “A few suggested that the pace of asset sales, and potentially of purchases, could be adjusted over time in response to developments in the economy and the evolution of the economic outlook”. Does this mean that the Federal Open Market Committee will adjust asset sales and purchases rather than the overnight Fed Funds rate? Perhaps!

Traders saw a higher-than-recently-normal amount of selling from originators Wednesday, which made mortgage rates move a little more than Treasury rates toward the downside. The minutes from the late-January meeting revealed that members debated how and when to shrink the central bank’s $2.26 trillion balance sheet, with some policy makers pushing to start selling assets in the “near future.” Officials unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries, but obviously there is concern about upsetting the stability of the markets.

Today we have another large amount of economic news with which to grapple. We have already had the Producer Price Index and Jobless Claims; still ahead are the Philly Fed and Leading Economic Indicators. The PPI showed that inflation picked up more than expected: +1.4%, with the core rate +.3%. Year-over-year the PPI was +4.6% and the core rate was +1.0%, roughly as expected. Jobless Claims rose 31k to 473,000. On this news stocks moved down, and rates improved somewhat: the yield on the 10-yr is chopping around 3.71% and mortgage prices are a tad better.

 Generally speaking locks desks around the nation were a little slower last week. Yesterday the MBAA reported that applications from last week were down about 2%, with purchases down 4% and refi’s down about 1%. Refi’s are still amounting to about 69% of the mortgage activity (what would your volumes look like if refi’s went below 50%?), and ARM loans are still less than 5%. Yesterday morning, after the Starts & Permits number, we learned that in January Industrial Production was +.9% and Capacity Utilization went from 71.9% to 72.6%, both relatively strong numbers.