Mortgage backed securities (MBS) prices are higher (rates lower), recovering a portion of yesterday's losses, in volatile trading on speculation the U.S. economy will not rebound soon enough to keep yields at their highest levels since November; FNMA 4.5% coupon 99.59bps, +21bps. We switched the current coupon from the 4.0% to 4.5% to better reflect market conditions. MBS prices are lower than their levels before the Fed announced March 18 it would expand purchases to stem the housing slump and bolster consumer spending. The Fed has made low mortgage rates a priority in its strategy to end the recession. Signs of a recovery in the U.S. have prompted investors to move out of the relative safety of fixed income assets, like MBS, and into higher yielding and more riskier assets. Rising yields make the governments rescue efforts more expensive. The yield curve, difference between 2yr & 10yr note yields, widened to 275bps, its highest ever on concern the flood of supply will overwhelm buying. A steepening yield curve suggests investors are demanding more to lend because of the risk an economic recovery will lead to faster inflation. Auctions so far this week have eased concern that international (China) investors will shy away from buying as U.S. borrowing surges. Durable goods orders jumped more than forecast, up 1.9% in April as a rebound in autos and a surge in defense spending overshadowed declines in business equipment. However, a downward revision to March, -2.1% vs -0.8%, left new orders below expected levels for April. Year over year, overall new orders for durable goods are down 24.4%. Intial jobless claims fell 13K to 623K, lower than forecast, from a revised higher 636K the prior week. The alarming news is a sizable 110K jump in continuing claims to a record 6.77 million, the 19th in a row, reflecting restrained hiring. Claims in coming weeks may climb amid restructuring in the auto industry. New home sales held steady in April at 352K, a bit lower than expected, but supply and price readings were positive. Supply is now at 10.1 months and the median price rose 3.7% to $209,700.