460 billion subprime, not so bad. Sell more bonds.

Treasuries rose a second straight day as U.S. durable goods orders unexpectedly fell last month and home sales dropped, adding to concern that the economy is in a recession. Government debt rallied even as the Treasury prepares to sell $28 billion in two-year notes today, the most since 1972.


Purchases of new homes slowed to a 590,000 annual pace last month, the lowest level in 13 years, from 601,000 in January, according to the Commerce Department. Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime- mortgage market, or almost four times the amount already disclosed.

Appetite may wane at the two-year note auction today amid a decrease in bets for Fed rate cuts. Traders see a 40 percent chance the Fed will cut its target rate a half percentage-point to 1.75 percent at its next meeting on April 30, compared with 82 percent a week ago, according to futures contracts on the Chicago Board of Trade. The rest of the bets are on a quarter- point reduction.

Merrill Lynch says let em go

Layoffs at Merrill have been a long time coming. Now they’re right around the corner. In the next several weeks, the nation's biggest brokerage will quietly begin a big round of layoffs as it looks to cut costs and shore up profits as the credit crunch deepens, sources tell Trader Monthly. Merrill officials are drawing up plans to cut 10 percent to 15 percent from the investment banking division, sources familiar with the plans said. That could put as many as 300 Merrill bankers out on the pavement. (Merrill employs about 2,100 bankers firmwide.) Meanwhile, the firm is also preparing for another big writedown. Although the exact size and timing is unclear, some people familiar with the situation say it could be as high as $8 billion.

$75 billion in treasuries next week, any buyers?

In a sign investors' loss of confidence in credit markets is deepening, rates on three-month Treasury bills fell to the lowest level since 1954. The Fed will auction $75 billion in Treasuries next week in exchange for an expanded array of collateral to ease the logjam in lending. Treasury prices are at unsustainable levels and we've completely backed away from the market.
Fed policy makers on March 18 cut their target lending rate by three-quarters of a percentage point to 2.25 percent, saying ``measures of inflation expectations have risen.'' The cut was smaller than the 1 percentage point traders had expected with 90 percent certainty before the meeting.

This week, a solid majority of panelists believe mortgage rates will rise over the next 35 to 45 days. About one-quarter think rates will fall, and the rest believe rates will remain relatively unchanged (plus or minus 2 basis points).