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Early on, MBS markets surged when the Durable Orders report came in weaker than expected. MBS markets attempted to rally again after Fed Chief Bernanke’s testimony to Congress. Later in the session, however, the momentum shifted, as investors reconsidered the implications of Bernanke’s comments, and MBS markets closed near the lows for the day. Tomorrow, the final revision to fourth quarter 2006 GDP will be released at 8:30 et, and a 5-yr Treasury auction will take place at 1:00 et.

In contrast to the Goldilocks economy present for much of 2006, in which economic growth was strong while inflation remained contained, Fed Chief Bernanke painted a less pleasant picture of current economic conditions. Inflation is running higher than the Fed’s comfort level, and Bernanke emphasized that the Fed’s primary policy concern is that inflation will not move lower as expected. On the other hand, he described the downside risks to economic growth, particularly if the problems in the housing sector were to expand. MBS investors attempted to balance the bad news about inflation with the more favorable news (for fixed income investors) about economic growth, producing a lot of movement in MBS prices.

Some very interesting comments were also made by Fed Director Sandra Braunstein about the subprime market and the recent increases in delinquencies and foreclosures. Here is a small part of the speech:

    “One of the products of this new mortgage market is subprime lending. Subprime lending has grown rapidly in recent years. In 1994, fewer than 5 percent of mortgage originations were subprime, but by 2005 about 20 percent of new mortgage loans were subprime. The expanded access to subprime mortgage credit has helped fuel growth in homeownership.”

It will be interesting to see how the decrease in subprime lending this year as a result of more restrictive underwriting guidelines impacts future sales numbers.

As always, talk with your lender about you option to lock your rates in and protect yourself against any future increase in rates before your closing.