MBIA downgrade is coming

Treasuries rose as Federal Reserve Chairman Ben S. Bernanke reiterated the need for interest rate cuts and a report showed manufacturing in the Philadelphia area tumbled this month. The Fed chairman acknowledged before Congress that the economy is weak enough to need a fiscal stimulus and reinforced expectations for the Fed to lower interest rates at least half a percentage point this month. This year's bond rally has pushed yields on two-year notes to the lowest level since 2004.
The two-year note's yield fell 6 basis points, or 0.06 percentage point, to 2.45 percent at 10:28 a.m. in New York. The price of the 3 1/4 percent security due in December 2009 rose 1/8, or $1.25 per $1,000 face amount, to 101 1/2.
The fallout from the collapse of the subprime mortgage market may widen. MBIA Inc. and Ambac Financial Group Inc., battered by losses from the collapse of the subprime mortgage market, fell the most ever in New York Stock Exchange trading on concern they will lose their AAA credit ratings. Losing the AAA ratings would cripple the bond insurers' business and throw doubt on the ratings of $2.4 trillion of debt the industry guarantees, causing as much as $200 billion in losses.
Merrill Lynch & Co., the largest U.S. brokerage, reported a record loss after writing down at least $15 billion of failed investments, ousting its chief executive officer and losing almost half of its market value in 2007. U.S. builders broke ground in December on fewer houses than forecast, making last year's decline in homebuilding the worst in almost three decades.
Many of you are wondering where rates are headed. One expert predicts..."rates are at extreme lows. The economy continues to slow and the Fed will cut short term rates further. These actions are inflationary and should drive long-term (fixed) rates higher.