Our benchmark FNMA 6.0% mortgage bond has shown less volatility over the past two sessions while the stock market continues to trade all over the map with huge point swings. The bond traded in a 25bp range and flirted with overhead resistance at $101.87 before settling for a 9bp gain to close at $101.81. The U.S. dollar jumped higher against the British pound and the euro as currency traders believe the Bank of England and the European Central Bank will begin cutting their key interest rates. Compared to our Fed funds rate of 1.5%, the 3.75% rate in the euro-zone countries and the 4.5% rate in Great Britain are high and have room to fall in the current economic situation. A stronger dollar is generally beneficial for U.S. bond prices. However, the Fed fund futures are indicating the Fed will cut our rates by 50bp when the FOMC meets next week and this should weaken the dollar slightly. Crude oil traders are selling oil futures on increasing fear there will be a severe economic recession in the U.S. that will significantly decrease demand for fuels. Crude oil futures plunged $5.45/ barrel to $66.73/ barrel and the dramatic fall in crude oil prices reduces the risk of inflation which in turn provides a better environment for the bond market. The credit markets continue to loosen up with slight improvements seen in the interbank market. The overnight U.S. dollar LIBOR rate continued its trend below the Fed Funds rate with a drop to 1.11% from yesterday's rate of 1.28%. Usually, the overnight LIBOR closely approximates the Fed Funds rate, currently at 1.50%. The 3-month LIBOR continued its downward path for the eighth consecutive day by falling to a rate of 3.54% from Tuesday's level of 3.83%. Today's LIBOR/OIS spread has risen slightly to 2.74% from Tuesday's 2.70%. The Fed announced they are raising the interest rate it pays banks that deposit excess cash reserves at the central bank. The new rate will be the fed funds target rate less 0.35%. The old formula was the fed funds rate less 0.75%. The Fed said the new rate 'would help foster trading in the funds market at rates closer to the target rate.' Lower corporate earnings guidance, the surge in the U.S. dollar, and plunging oil and commodity prices are signaling a global economic slowdown at best and a possible severe global recession at worst. Hedge funds and mutual funds are getting hit with record redemption requests causing extensive selling of stocks. A record $75 billion worth of redemptions in September has reportedly already been exceeded during the first two weeks of October. The Dow continued its losing ways with a 514 point loss to finish at 8,519 while the broader S&P 500 Index tumbled 58 points to close at 896. The NASDAQ Composite Index lost 80 points to end at 1,615.

Another Fed Day arrived and in a unanimous decision, the FOMC cut the Fed funds rate by 50bp to 1.0% and also slashed their discount window rate by 50bp, taking it down to 1.25%. The bond market reacted by toppling our benchmark FNMA 6.0% mortgage bond from its high of $100.28 and pared a potentially larger intraday gain to 9bp for a close at $99.81. The FOMC cited a clear slowdown in economic activity, business equipment spending, and industrial production as a primary reason for their decision. They also stated slowing foreign economic activity will dampen prospects for U.S. exports. As a result, the Fed expects 'inflation to moderate in coming quarters' but 'downside risks to growth remain.' This language leaves the door open for further rate cuts in the future if the Fed decides they are needed to keep the economy from falling into a severe, protracted recession. As expected, the Fed's actions weakened the U.S. dollar and this in turn triggered a spike in oil (+$6/barrel) and gold (+$13/oz) prices. Durable Goods Orders surprised to the upside with an unexpected gain of 0.8% during September. Economists had forecast a -1.0% drop in orders. The gain was a vast improvement over the August level of -4.5% and was led by a strong demand for airplanes. However, after filtering out transportation goods, orders declined by 1.1%. Core capital equipment orders from manufacturers fell 1.4% following a 2.2% drop in August. This news was largely ignored by the market. The stock market also experienced some severe volatility as nice gains in the Dow and S&P 500 suddenly became losses during the last 15 minutes of trading when short-term traders sold to take profits following yesterday's sharp rally. The stock market ended 'mixed' with the Dow losing 74 points after being up by 297 at one point to close at 8,990. The broader S&P 500 Index dropped 10 points to 930 but the NASDAQ Composite Index added 7 points to end at 1,657.

Our benchmark FNMA 6.0% mortgage bond struggled for the 4th consecutive session and continued its losing ways with a loss of 53bp to close at $99.75. Bonds were sold ahead of tomorrow's FOMC interest rate decision and Policy Statement set for release at 2:15 p.m. ET. Added supply of $34 billion in 2-year Treasury Notes also weighed on the bond market. Most Fed analysts are expecting a 50bp rate cut and such rate cuts usually weaken the U.S. dollar and make investments in higher yielding foreign debt more attractive to investors with the net effect of lowering U.S. bond prices and raising interest rates. Today's poor economic news failed to provide support for bonds. The recent plunge in the stock market coupled with declining home values and job losses sent Consumer Confidence reeling in October to its worst level in history with a reading of 38 vs. expectations of 52. For comparison, Consumer Confidence was 95.2 a year ago. The S&P Case-Shiller 10 and 20-city Home Price Indexes fell for the 25th straight month with the 10-city index falling 1.1% in August while the larger 20-city index fell by 1%. Both indexes set record year-over-year declines. In the credit markets, both one and three-month dollar-based LIBOR rates widened very slightly to 3.22% and 3.51% respectively indicating banks would rather hold onto their cash rather than to loan it out. This is not being ignored by the government as the Administration served notice to U.S. banks today to stop sitting on their cash and to loan it out instead. Asian and European stock markets bounced back today and this positive investor sentiment spread to our stock market as well. As a result, bond prices fell as money flowed back into stocks from bonds. The German DAX Index had a particularly good day with a 11% rise triggered by an ongoing short squeeze in shares of Volkswagen. VW's shares rose 150% yesterday and another 80% today following an announcement that Porsche increased its holdings to 42.6% in the automaker along with buying an additional 31.5% in cash-settled stock options to boost its ownership to 74.1% in VW. Porsche's buying has squeezed hedge funds having large short positions in VW at a time when there is now only 5% of free-floating shares available for purchase. These hedge funds are not only losing their short positions, they are losing their shorts as well. Meanwhile, the U.S. stock market shrugged off today's dismal economic news and roared back with one of its best days ever. The Dow shot 889 points higher, its 2nd largest gain in history, to close at 9,065 as traders anticipated another juicy Fed rate cut tomorrow. The broader S&P 500 Index soared 91 points to finish at 940 and the NASDAQ Composite Index jumped 143 points to end at 1,649. It will be interesting to see whether or not today's stock market rally is a case of 'buy the rumor and sell the news' with respect to tomorrow's Fed rate cut.

Our benchmark FNMA 6.0% mortgage bond expanded its intra-day trading range to 88bp today before falling to across the board sales of all asset classes with a loss of 66bp and a close at $100.75. Existing Home Sales surprised to the upside in Sept. with a 5.5% increase to 5.18 million vs. estimates of 4.95 million. Median home prices fell 9% from the year-ago period to $191,600. The unsold existing home inventory fell 1.6% to 4.27 million representing a 9.9 month supply. The NAHB is forecasting new home construction of 936,000 units for 2008, the smallest total since 1945. The overnight U.S. dollar LIBOR rate edged higher to 1.28% from Thursday's 1.206%. The 3-month U.S. dollar LIBOR fell slightly this morning to 3.516% from yesterday's 3.535%. Taiwan just issued a new rule restricting insurance companies investing in mortgage-backed securities (MBS) issued by Fannie Mae, Freddie Mac and Ginnie Mae. Maximum exposure to MBS and collateralized issues by any individual insurance company will now be set at 25% of their offshore investment limit. If restrictions of this nature are adopted by other foreign countries we could see less demand for our MBS develop over time resulting in higher mortgage rates. A global rout in stocks was in full force with major foreign stock exchanges falling 8-10% overnight as investors cashed in their positions over fears of a deepening global recession. Britain's FTSE 100 Index dropped 8.67%, France's CAC40 Index fell 10%, Germany's DAX Index plunged 10.76%, and Japan's Nikkei Index was sliced by 9.60%. This negative market sentiment spilled over into our stock market as well with the Dow and S&P 500 futures beginning today's session 'limit down' and frozen. This action may be signaling true capitulation where investors 'throw in the towel' and sell every asset class to get out of the market. Even high quality investments are not immune to such indiscriminate selling. The Dow traded in a large 496 point intraday range before falling 312 points to end at 8,378. The broader S&P 500 Index lost 51 points to close at 876 while the NASDAQ Composite Index dropped 31 points to close at 1,552.

Our benchmark FNMA 6.0% mortgage bond climbed back on the volatility swing today and made a turn lower with a loss of 41bp to close at $101.41. The bond chart was weaker technically from the onset following a pull-back from overhead resistance located at $101.87, even though this morning's economic news was worse than forecast. Hedge fund and mutual fund redemptions are resulting in just about all asset classes being sold including mortgage bonds. Sales proceeds are mostly being parked into U.S. Treasuries as investors engage in a 'flight to quality.' Jobless Claims increased by 15,000 in the latest week to 478,000 vs. expectations for a slight rise to 465,000 claims from the prior week's upwardly revised total of 463,000. However, the four-week moving average declined by 4,500 to 480,250 claims. The four-week moving average for continuing claims increased by 44,250 to 3.68 million to reach their highest level in more than five years. The claims data is consistent with a labor market that is struggling with an economic recession. RealtyTrac announced foreclosure filings fell by 12% to 265,968 in September from the number of foreclosures filed in August but they were still 21% higher than the year ago period. Meanwhile, Sheila Bair, head of the FDIC testified before the Senate Banking Committee that the FDIC and the Treasury Dept. are working together to develop and implement a plan to prevent avoidable mortgage foreclosures from taking place. The 3-month U.S. dollar LIBOR is sitting at 3.535% but similar inter-bank lending rates are beginning to rise in Asia and Australia, signaling credit markets in the Far East might be tightening rather than loosening up. The Libor-OIS spread, which measures the difference between the three-month dollar rate and the overnight indexed swap rate, fell to 2.50% for the first time since Sept. 30. The spread was 2.70% on Tuesday and was 3.64% on October 10. The stock market was buffeted with selling from investors concerned about the health of the economy and from those who went bargain hunting for beaten down blue-chip stocks. The market finished 'mixed' after a large 552 point swing in the Dow that resulted in a 172 point gain and close at 8,691. The broader S&P 500 Index picked up 11 points to end at 908 while the NASDAQ Composite Index fell 11 points, finishing at 1,603.

Our benchmark FNMA 6.0% mortgage bond ran into a tough layer of overhead resistance at $101.87 and then pulled back to end flat with a close at $101.72. Risk in the credit markets is decreasing as global central bank interventions in the credit markets are giving banks the confidence to stop stashing their cash and increase their inter-bank loaning activities. The Fed was active today in battling the credit crisis by announcing a new program to buy assets from distressed money market mutual funds that are undergoing large redemptions. The Fed is setting up five fund facilities to be run by JPMorgan Chase to buy up to $540 billion in short-term certificates of deposit, bank notes and commercial paper from money market funds. Today's data shows credit markets are continuing to ease as this inter-bank confidence is restored. The overnight U.S. dollar LIBOR rate fell sharply below the Fed Funds rate to 1.28% from yesterday's mark of 1.51%. Usually, the overnight LIBOR closely approximates the Fed Funds rate, currently at 1.50%. Meanwhile, the 3-month LIBOR continues to trend lower for the seventh consecutive day with a rate of 3.83% vs. yesterday's level of 4.06%. However, the 3-month LIBOR is still 101bp above the 2.82% rate seen before the credit crisis began in mid-September. The LIBOR/OIS spread continues to fall and has dropped 23bp to 2.70% from 2.93% on Monday. The 'TED spread' has dropped to 2.60% from 3.25% on Monday. The TED spread measures the difference between the 3-month LIBOR and the 3-month Treasury bill, and is a key measure of risk. Disappointing 3rd Qtr. earnings and guidance from DuPont, Texas Instruments, and Sun Microsystems gave traders an excuse to take profits from yesterday's rally while investors became more guarded about future corporate earnings prospects. The Dow was pared by 231 points to close at 9,033 while the broader S&P 500 Index was trimmed by 30 points to end at 955. The tech-laden NASDAQ Composite Index shed 73 points to finish at 1,696.

Our benchmark FNMA 6.0% mortgage bond had one of its strongest days in many months, notching a 103bp gain to close at $101.72. The catalyst for the surprising jump higher was news that giant bond fund firm PIMCO was buying mortgage backed securities, including nationally backed Fannie Mae and Freddie Mac issues, hand over fist. PIMCO's buying has raised its MBS inventory to its highest level since 2000. The day's only economic news surprised to the upside. September's Index of Leading Economic Indicators (LEI) rose by 0.3% vs. expectations for a fall of -0.3%. It was the first gain in the LEI since April and if the LEI can continue to post positive monthly numbers it could forecast a turning point in the economy six to nine months from now. This morning's credit market data is showing tight credit markets are beginning to ease as confidence is slowly being restored in the global financial system. Another foreign central bank joined the fight against the credit freeze with the South Korean government announcing they would guarantee up to $100 billion in foreign-currency loans while investing $30 billion in their banking sector. The overnight LIBOR rate dropped to 1.51% from 1.67% Friday to closely mirror the Fed Funds rate of 1.5%. Two weeks ago the overnight LIBOR reached a peak of 6.88%. The 3-month LIBOR continues to trend lower for the sixth consecutive day with a rate of 4.06% from Friday's level of 4.41%. The 'TED spread' fell to 3.25% from 3.63% Friday. The TED spread measures the difference between the 3-month LIBOR and the 3-month Treasury bill, and is a key measure of risk. The higher the spread, the more unwilling investors are to take risks. The spread was 1.04% about a month ago and hit a record high of 4.65% just over a week ago. The LIBOR/OIS spread, the spread between the dollar LIBOR and overnight index swap rates, measures how much cash is available for lending between banks and is also used for determining lending rates. The larger the spread, the less cash is available for lending between banks. The LIBOR-OIS spread has fallen to 2.93% from 3.28% on Friday. Fed Chairman Ben 'the Helicopter' Bernanke testified before the House Budget Committee on the U.S. economic recovery and stated Congress may need to stimulate the economy by either returning money to taxpayers or increasing government spending in order to avoid an extended economic slowdown. The stock market liked what Bernanke had to say, but investors gained greater confidence when they saw the credit markets thawing out. The Dow surged 413 points higher to close at 9,265. The broader S&P 500 Index added 44 points to finish at 985 and the NASDAQ Composite Index picked up 58 points to end at 1,770.

The volatility of our benchmark FNMA 6.0% mortgage bond eased somewhat as the bond traded in 'only' a 44bp intra-day range. Bond prices fought their way above resistance at $100.59 in choppy trading to close 22bp higher at $100.69. Mortgage bonds received a boost early in the session following another gloomy housing report. Housing Starts fell in September by 6% to a worse than forecast level of 817,000, a 17-year low. Economists were expecting 870,000 new Starts. Building Permits fared even worse with an 8% drop to 786,000, a 27 year low. Economists were looking for 840,000 Permits in September. The data suggests the inventory of new homes overhanging the housing market will gradually be worked off. Consumers are feeling more pessimistic about the economy. The preliminary Consumer Sentiment Index from the Univ. of Michigan for October fell to a lower than forecast 57.5 vs. expectations of 65.0 and well below September's level of 70.3. Frozen credit markets continue to slowly thaw. The LIBOR/OIS spread, the spread between the dollar LIBOR and overnight index swap rates, is a popular indicator for the willingness of banks to lend to each other and is being used to monitor the state of the credit market. The higher the spread, the less likely banks will lend to one another. Before the credit crunch hit beginning in August 2007, the average LIBOR/OIS spread was 11bp. This week it eased to 331bp from 341bp, but still remains extremely high historically. Meanwhile, LIBOR inter-bank lending rates continued to slip today with three month U.S. dollar LIBOR loans falling to 4.41% from yesterday's 4.50%. The stock market resumed its rollercoaster journey today as hedge funds continue to deleverage while some mutual funds sell stock to meet an increase in redemptions. Their actions in the stock market are causing record volatility and huge intraday price swings as they are forced to liquidate positions. We look for this trend to continue as hedge funds in particular are experiencing large redemptions from their wealthy clients. The Dow Industrials were volatile once again and traded within a 563 point range before falling 127 points lower to close at 8,852. The broader S&P 500 Index fell by 5 points to end at 940 while the NASDAQ Composite Index lost 6 points to finish at 1,711.

Our benchmark FNMA 6.0% mortgage bond traded in a 56bp range to finish 6bp higher with a close at $100.47. There was a tsunami of financial and economic news for the markets to consider but investor sentiment and structural problems like deleveraging and forced selling by large hedge funds are driving the financial markets and creating large swings in the indexes. Merrill Lynch reported a larger than expected loss of $5.2 billion. Citigroup reported a quarterly loss of $2.8 billion in earnings. The Bank of New York Mellon Corp. reported their third quarter profits plunged by 53% with earnings of $303 million or $0.26/share. At least they booked a profit. The Swiss government is taking a 9% equity stake in banking giant UBS for $5.25 billion plus they are taking $60 billion in troubled residential and commercial mortgage related assets off of the bank's balance sheet. Inflation moderated in Sept. with the headline CPI reported flat at 0.0% vs. a consensus estimate of 0.2% with the Core CPI coming in less than expected at 0.1% vs. a forecast of 0.2%. Over the past year, the CPI has increased by 4.9% while the Core CPI has risen by 2.5%. The Philadelphia Fed Manufacturing Index fell off of a cliff at -37.5 confirming a swift slowdown in manufacturing activity in the Mid-Atlantic Region during October, its worst level since Oct. 1990. Industrial Production plunged by -2.8% in September, the most since late 1974. Net Foreign Purchases, a measure of foreign demand for our debt and equities, rose to $14 billion in August from a revised $8.6 billion. LIBOR inter-bank lending rates are continuing to ease. Three month U.S. dollar LIBOR loans fell slightly to 4.50% from yesterday's 4.55%. The Dow Industrials put in another day of stunning volatility by trading within an 816 point range before ending 401 points higher to close at 8,979. The broader S&P 500 Index rebounded 38 points to finish at 946 while the NASDAQ Composite Index gained 89 points to end at 1,717.

Our benchmark FNMA 6.0% mortgage bond had one of its wildest intraday price swings since the credit crisis began after it traded in a 131bp range to end 81bp higher with a close of $100.41. At one point the bond had traded 47bp lower than yesterday's close of $99.59. Worse than forecast economic news negatively impacted the stock market while sparking safe haven buying in bonds. The day's economic news was dismal with Retail Sales suffering their worst decline in three years with a -1.2% plunge vs. expectations of a -0.7% decline. Wholesale prices remained high though with the Core Producer Price Index reported at 0.4% vs. the consensus estimate of 0.2% while recording its largest annual increase in more than 17 years. New York region manufacturing was very weak for October with a record low of -24.6 vs. expectations of -10.0. Readings below zero indicate a contraction in manufacturing activity. To make matters worse for stocks, Fed Chairman Ben Bernanke didn't have any soothing words for the market when he spoke about the current condition of the economy before the Economic Club of New York. Bernanke said the economy 'won't snap back quickly even if badly needed confidence in the U.S. financial system returns and roiled markets finally calm.' Big Ben went on to say a 'broader economic recovery will not happen right away.' The Fed's Beige Book, a monthly summary of economic activity, seems to confirm this as it showed a rapidly weakening economy during September. Declines in consumer spending and retail sales were noted as were slowdowns for manufacturing and services companies. Real estate markets remained weak while credit markets tightened up with reduced credit availability. Many economists now believe the U.S. is mired within its first recession since 2001. Meanwhile, the credit markets have been showing early signs of thawing out while investor demand for safe haven assets remains relatively high. Inter-bank lending rates are continuing to edge lower today. LIBOR for three month U.S. dollar loans fell to 4.55% from yesterday's 4.635%, Monday's 4.75%, and from last Friday's level of 4.81% - a welcome trend. The Dow Industrials were torpedoed once more with a loss of 733 points to close well below 9,000 at 8,577. The broader S&P 500 Index didn't fare any better with a 8% loss of 90 points and a close at 907. The NASDAQ Composite Index made it a trifecta for major index losses with a 150 point plunge and close of 1,628.

Bonds are hovering above a very important support level this morning. Bonds recently fell below a strong floor of support at the 200-day moving average, the selling pressure mounted and bonds lost 200 basis points in just 3 days. This new low is the potential current floor of support. With giants like Coke, Intel and JP Morgan Chase posting better-than-expected earnings results, Stocks are under heavy selling pressure this morning due to concerns it will take a while for the Fed action of late to help the system. Retail sales also fell and presented the biggest drop in three years. This could be a further sign that we have gone into a recession. Also today, Fed Chairman Bernanke is speaking today--and this can always be a market mover. The markets continue to act sporadically, but given all the news of the day, we are carefully floating anticipating this floor of support."

Our benchmark FNMA 5.5% mortgage bond tried to rally early in the session by moving 82bp higher from a lower open at $97.81 but then swung 119bp the other way to resume its downward trend with a loss of 81bp to close at $97.44. The bond market fought lower bond trading volumes and news of a global coordinated effort by the world's major economic powers to guarantee inter-bank loans and allow governments to purchase stock in troubled banking firms. The government bailouts put investor concerns over the credit crunch more at ease while many Fed analysts feel the Fed will cut short-term interest rates by 25 to 50bp at their next FOMC meeting at the end of October. This sentiment pressured bonds lower as did news of S&P ratings downgrades on debt issuers. S&P downgraded 227 issuers affecting $1.8 trillion of rated debt in U.S. dollars and $1.3 trillion rated in Euros. The day's big news came from the Bush Administration including Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke, and FDIC Chairman Sheila Bair when they announced a plan to use $250 billion of the $700 billion appropriated in the financial rescue bailout bill recently passed by Congress. The plan will allow the government to buy and temporarily hold preferred stock in major American banks and thrifts. The government will begin by buying stock in nine of the largest banks including Bank of America, JPMorgan Chase, and Citigroup. Other plan features include allowing the FDIC to temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies while the Federal Reserve implements their Commercial Paper Funding Facility (CPFF) program. The CPFF will fund purchases of commercial paper of 3 month maturity beginning October 27 in an effort to support the commercial paper market. This plan is designed to improve inter-bank lending and thaw frozen money and credit markets. So far there has been a favorable reaction among banks as inter-bank lending rates as measured by LIBOR continued to ease by falling to 4.635% today from 4.7525% yesterday and from last Friday's level of 4.81875%. The stock market rallied strongly on the plan's announcement but traders quickly stepped in to sell to lock in gains from yesterday's massive move higher. The Dow traded in a 709 point range before falling 76 points to close at 9,310. The broader S&P 500 Index lost 5 points to end at 998 while the NASDAQ Composite Index dropped 65 points to finish at 1,779.

Our benchmark FNMA 5.5% mortgage bond was taken to the woodshed once again as bond traders sold longer-term debt and moved into shorter-term debt, as short as they could find it. The bond ended at its low of the day, down 109bp to close at $98.25. The financial crisis continued to grip the world and like the tiger who chased its tail, stock markets around the globe are chasing each other and are turning to butter. Foreign markets were lower over night as they chased yesterday's steep drop in the U.S. stock market. Today, the major U.S. stock market indexes spiraled lower before coming off steep losses to finish 'mixed.' No one seems to want to own any asset classes but cash. Not stocks, bonds, or commodities. This reminds us of former New York Yankee great Yogi Berra in the Aflac commercial where he says 'And they give you cash which is just the same as money!' No one really knows when the selling will end. Oil prices fell to 52-week lows, falling about $5.50 per barrel to $81.10 per barrel. Oil investors are afraid the global financial crisis will lead to a severe global economic recession and will slash demand for oil products. The International Energy Agency cut its demand estimates by 240,000 barrels per day for the rest of this year and by 440,000 barrels per day for 2009. Lost in the financial crisis news, there was good news on the inflation front. Import prices dropped by 3% during September while oil prices fell 9%, the largest decrease since October 2006. Overall, import prices have risen 14.5% over the past 12 months but import prices for foods, feeds and beverages declined by 1.7% in September, the largest decline since February 2006. The Balance of Trade fell during August to -$59.1 billion, slightly less than the consensus forecast of -$60.0 billion and down slightly from July's level of -$62.2 billion. The financial markets need a 'time out' and they'll get one Monday in the U.S. as they remain closed in observance of the Columbus Day Holiday. After plunging by about 700 points from the Open, the Dow briefly moved into positive territory with about a 300 point gain before retreating to lose 'only 128 points' to close at 8,451. Now that is extreme volatility. The broader S&P 500 Index extended its losses by 10 points to finish at 899 while the NASDAQ Composite Index was the one bright spot on the day with a 4 point gain to end at 1,649.

Our benchmark FNMA 5.5% mortgage bond saw another day of extreme volatility, ending 88bp lower to close at $99.34 after trading in a wide 91bp range. Bonds were under pressure from the beginning as traders knew added bond supply was coming from the Treasury as it steps up its funding operations for the recently passed $700 billion bail out plan. The Treasury auctioned $20 billion in reopened 10-year bonds and $30 billion in cash management bills while the Fed funded $37.5 billion in its Term Securities Lending Facility. Stocks plunged lower for a 7th consecutive day as shares of financial and insurance companies led the market lower despite early positive sentiment generated from good 3rd quarter earnings news from tech giant IBM. Shares of regional banks and insurance companies were particularly hard hit after Treasury Secretary Henry Paulson voiced a warning that 'the economy faces difficult challenges' and that 'more banks will fail before credit conditions improve.' Investors have become greatly concerned over continuing deterioration in the credit markets. The credit markets continue to remain frozen with the LIBOR/OIS spread widening by 25bp from yesterday to 3.46% while the three-month U.S. dollar LIBOR rate climbed to 4.75% from yesterday's 4.52%. The overnight U.S. dollar LIBOR rate eased slightly falling to 5.09% from 5.38% while overnight Euro LIBOR rates fell to 3.94% from yesterday's rate of 4.35%. This suggests banks are only willing to risk lending overnight to one another while the pool of money available for loans between banks is shrinking. The stock market is clearly in capitulation mode with the S&P 500 Volatility Index trading at 64, higher than the level seen during the Crash of 1987. Today's stock market action showed when investors want out, they want out and there is nothing that can stop them. After advancing about 150 points, the Dow swung 868 points lower to lose 678 points, finishing at 8,579. The broader S&P 500 Index was hit with a 75 point loss to end at 909 while the NASDAQ Composite Index fell 95 points to end at 1,645.