Now it's time for the capital markets to deal with the ongoing task of interpreting and acting upon the tacit and explicit implications of last week's once-in-a-lifetime events.

We headed into the weekend with the announcement of "the next big thing" on Uncle Hank's list of bail-out bombshells, an old school RTC-esque plan that would allow the treasury to effectively "dive on the grenade," by being able to buy all manner of toxic assets, including, but not limited to, our good friend: MBS. A few notable inclusions in the working draft of the legislation are a 700 billion dollar revolving line for the purchasing effort, explicitly stated "no oversight" for Hank (to say this would make him the most powerful man in the world, as some have, would be an understatement), and perhaps of most interest to the masses is the purposely ambiguous treatment of taxpayer implications. It is that last inclusion that has so many up in arms. And tangentially, it might upset and MBS devotee or two to know that although this plan has served to tremendously tighten spreads (a good thing), it has so greatly damaged treasuries ( for reasons we'll discuss momentarily), that mortgages are down again this morning.

What's so bad about a plan that should ostensibly help MBS? First of all, remember, this DOES help MBS and quite frankly, it already has. One challenge for mortgage broker types to remember is that we are one of the very few groups with a vested interest in the fixed income markets, who yet ARE NOT primarily concerned with "spread," except inasmuch as it can be a metric that aids our forecasting ability. So to say there are parts of this plan which are damaging MBS is only accurate inasmuch as the actual "price vs. price" decrease in one particular coupon. The rest of the kids at the fixed income table tend to be significantly more interested in spread, and that's where MBS victory is more apparent. To us though, that's only a positive as it alludes to a shift between an utterly panicked FTQ run, and the mythological MBS bid riding back into town on a silver stallion.

But back to the bad... There are a few negatives for us to consider that may be putting a negative bias on fixed income price action this morning.

• Since we have to increase our debtload almost a trillion dollars to execute this plan, critics were quick to point out that more of the "green stuff" would need to be printed. that = inflation/weaker dollar... It has also sparked a not-insignificant sell-off in treasuries.
• As we are do fond of discussing, bonds hate inflation. If I have a contract to collect a fixed amount of interest from you over time based on today's dollars, if "today's dollars" get less valuable, my return on investment is going to go down. So to the extent that I buy this whole "devalued currency/inflation" argument, I'd also have to position myself for that expectation by demanding a higher yield than I would in an inflation-vacuum. And of course, higher yield=higher rates.
• A synergistic negative here is that commodity prices are moving back up again as the whole world is betting against the US dollar and the US treasury. In fact, a few grumblings were heard from the peanut gallery that pondered the ability of the treasuries to continue to be called the "risk-free benchmark." Hey folks, we ain't there yet, but the ravings of the ostensibly insane can, at times, be an eerily ironic foreshadowing of things to come.

Whatever it is and whatever it isn't, 5.5's are still down 10 ticks from "going out" levels and over 20 ticks from the close. Sitting right now at 100-02. Treasuries are down a further piece with the 10 year off closer to a point from the close. And pretty much everything equities-related is down appreciably. Now, THAT confluence of negative price action is just about the first piece of good news this morning. You know what we like to point out in times like these? Money moving to the sidelines to wait and see where the ball lands. Huh?

Just consider the last 2 weeks.... Frannie bailout, Lehman BK, Merril fire-sale, AIG bailed out, short-sellers muzzled, Wamu on the block, Morgan and Goldman decide to drop out of conventional invesment bank model, a move that will greatly decrease their capital, and just when the capital markets seemed on the verge of oblivion, treasury unveils one of the most significant plans in the history of, well, in the history of economies.

Given the above, although there are certainly reasons for negative price action this morning, at least an "honorable mention" in that company is the fact that the captial markets have quite a bit to digest. And digest they will, and things will likely improve in time. So unless we have further price weakness this AM, we are in the same boat as many of the market particpants that are pulling their money out this morning.... "wait and see."