Mortgage backed securities (MBS) prices opened lower this morning after yesterday's gains which were fueled by stock market losses (DOW -200pts & S&P 500 -3.1%) boosting demand for fixed income assets, like MBS. MBS prices have since rebounded; FNMA 5.0% coupon 101.309ps, +8bp, the high of the day from an intra-day low of 101.13bps. Today the Treasury will auction $40 billion of 2yr notes, first of this week's three sales totalling a record $104 billion. The last auction drew the most demand since November 2006 from foreign central banks, helping ease concern that international investors will begin to shy away from Treasuries as U.S. borrowing surges to fund bank bailouts, fiscal stimulus spending and a record budget deficit. The budget deficit is projected to increase to $1.85 trillion this year, equivalent to 13% of the nation's economy. The Fed starts a two day meeting today to consider any changes to its pledge to buy Treasuries, agency debt and MBS to lower consumer borrowing costs, and whether to keep its benchmark interest rate near zero. Fed policy makers will continue to explore how and when to wean the economy off stimulative medicine to avoid fanning inflation. The FOMC statement is due at 1115am pt tomorrow. Fed funds futures show a 40% chance the Fed will raise interest rates by at least .25bps by December. The Fed purchased $7.5 billion of U.S. debt yesterday as part of its effort to stop rates from rising. Chain store sales continue to be very weak, according to ICSC-Goldman & Redbook, due to recessionary conditions and wet weather. Crude oil prices increased after falling three days in a row as a weaker dollar boosted the appeal of commodities as an alternative investment. The dollar declined on speculation that the Fed will temper expectations for an interest rate increase. Existing Home Sales were up 2.4% in May to an annual rate of 4.77 million, but below expectations of 4.85 million. Supply is coming down slowing, at 9.6 months from 10.1 months in April. Prices firmed up 3.8% to a median sales price of $173,000, but are down 16.8% on an annual basis. There was a steep drop in the proportion of distressed sales, to about one third from nearly half in prior months. More importantly, unrealistically low appraisals are scuttling sales and slowing the housing recovery. Can you say HVCC!