As one trading desk reported, “…mortgage spreads benefited early in the day from overseas buying and spreads tightened. But MBS’s then lagged and spreads moved wider, and by the end of the day mortgage spreads were at their widest levels of the day which happened to be on spread to the previous day…” Huh? Although newspapers don’t discuss them, and borrowers don’t know what they are, “spreads” are an integral part of bond market pricing. Basically, for mortgages it is the difference between one yield/rate and another yield/rate in the capital markets. And what causes the difference? It includes the perceived risk of a mortgage, and thus the expected cash flows an investor can expect to receive from it. Pools of mortgages (and other debt instruments) generally trade as a spread off of risk-free Treasury yields, and as the risk increases, or the demand decreases, etc., the spread widens.

Morgan Stanley's best guess for the housing market in the United Kingdom is that prices will fall 10% this year and 5% next, pushing values 15% lower over the next two years and cutting the value of property by 20% after allowing for inflation. Half of all borrowers taking out mortgages over the past few years put down less than a 20% deposit, according to the bank, which estimates this could leave 10% in negative equity. Of course Interest rates and action by the Bank of England may alleviate a portion of this, but their problems and ours are similar.

Credit Suisse announced that they lost money in the first quarter after taking another $5.2 billion of write-downs on risky assets, while Barclays said it remained profitable in the quarter. Credit Suisse's stock is still down 45% from its high around a year ago. On the other hand, Barclays made a profit in each of its securities, asset- management and wealth-management units, even though earnings fell “well below” last year’s.

Rates are higher this morning, and mortgage prices are worse. The Labor Department reported that the number of U.S. workers filing initial claims for unemployment benefits unexpectedly fell by 33,000 last week. Analysts expected an increase to 375k from 372k last week. The four-week moving average of new claims, a more reliable guide to underlying labor trends because it irons out weekly fluctuations, fell last week to 369,500 from 376,750. (And fewer people filing claims means more are working, and consumer confidence will increase, right? Perhaps.) We also saw new orders for long-lasting U.S. manufactured goods unexpectedly fall 0.3% in March after transportation slumped. The Commerce Department said new orders excluding transportation rose 1.5%, while transportation equipment fell 4.6%, including a matching drop in motor vehicles and parts which was the steepest drop since last August. Nondefense capital goods orders excluding aircraft were unchanged as forecast and the previous month was revised up to show a 2.0 percent decline, from a 2.4 percent drop reported before.

Later this morning we have New Home Sales, expected to decline 10k to 580,000, a huge drop since the peak in mid-2005, and also a US Treasury auction of $19 billion of 5-yr Treasury Notes. Currently the 10-yr is up around 3.78% and 30-yr fixed-rate A-paper mortgages are worse by about .250 in price.

A tour bus driver is driving with a bus load of seniors down a highway when he is tapped on his shoulder by a little old lady. She offers him a handful of peanuts, which he gratefully munches up.
After about 15 minutes, she taps him on his shoulder again and she hands him another handful of peanuts. She repeats this gesture about five more times.
When she is about to hand him another batch again he asks the little old lady, “Why don't you eat the peanuts yourself?”
“We can't chew them because we've no teeth,” she replied.
The puzzled driver asks, “Why do you buy them then?”
The old lady replies, “We just love the chocolate around them.”

Rob