Market Snapshot From IRM December 31, 2008 What’s New U.S. Market Highlights Data Highlight U.S. Libor update: Today, 1-month Libor reached a record 1-month U.S. Libor: 0.43625% Mortgage applications at 5 year high: low of 0.43625% and 3-month Libor reached its lowest level 3-month U.S. Libor: 1.42500% Applications for home mortgages in the of ‘08, setting at 1.42500%. The all-time low for 3-month Libor U.S. reached their highest level in over 5 was 1.00%, set back on June 25, ‘03. For December, 1 & 3- 2-year U.S. Swap Rate: * 1.45% 3-year U.S. Swap Rate: * 1.74% years amid lower mortgage rates. The month Libor declined a respective 146.5 & 79.2 bps. For all of Mortgage Bankers Association’s ‘08, declines were significant with 1 & 3-month Libor falling 5-year U.S. Swap Rate: * 2.12% applications index (captures activity to 416 & 328 bps respectively. * Indicative rates, as of 5:00 pm (ET) today buy or refi a home) rose to 1,245.7 for Expectations for U.S. Libor: According to the Eurodollar the week ending Dec 26, the highest futures market, 3-month Libor is expected to decline to a low U.S. Swap Rate Changes for since 2003 and fractionally above the of 1.075% in Q1 ‘09 (implying a 35 bps decline from today’s 2008 in bps 0 prior week’s level of 1,245.4. setting) and gradually climb back to 2.13% by the end of ‘10. Mortgage Application Index Expectations for fed funds: The fed funds futures market (110) (234) (214) (204) (210) Mortgage Bankers Association anticipates the current 0% to 0.25% funds target (range) (220) (328) past 2 years climbing to 0.65% by the end of ‘09 and to 1.20% by mid ‘10. (330) 1250 Year-end assessment: The money markets are arguably 3m 2 yr 3 yr 5yr 10 yr 950 better functioning now than at any time since mid-Sept (failure of Lehman). The narrowing in the spread between U.S. swap market update: 3 to 10-year 650 Libor and the fed funds effective rate (chart reflecting 3m U.S. swap rates reached record lows Libor) highlights the progress. this month amid further declines in U.S. 350 Treasury yields, extraordinary Fed Jan-07 Aug-07 Apr-08 Dec-08 3-month U.S. Libor minus the Fed Funds accommodation (which established a Effective Rate - in bps 0% to 0.25% target range for the fed The large drop in mortgage rates came 410 Oct 10 after the Federal Reserve’s decision on funds rate) and deepening economic 260 Since Sept peak concerns over unemployment and November 25 to initiate a program to falling retail sales, manufacturing & purchase the direct obligations of 110 housing activity. The low in 2-year U.S. Fannie Mae, Freddie Mac and the swap rates occurred June 2003 - this Federal Home Loan Banks as well as -40 Mortgage-Backed Securities backed by week, 2-year swaps came within 15 Jul-07 Dec-07 Jun-08 Dec-08 bps of that all-time low. Fannie, Freddie and Ginnie Mae. U.S. Treasurys: Record low yields for 30-Year Fixed US Mortgage Rates The FOMC’s aggressive rate cuts in Q4 ’08 combined with the 2-30-year Treasurys were established in percent - past 7 months Fed’s introduction and expansion of extensive non-interest on Dec 17 (2 & 5-year) and Dec 18 (10 & rate liquidity mechanisms, has led to lower certificate of 30-year). 6.6 Since deposit, commercial paper and money market rates as well Yield curve: The spread between 2 & 6.2 Nov 25 as increased CP issuance (since mid-Oct) and non-bank 10-year U.S. Treasury yields ends ‘08 at 5.7 money market cash balances (since early Oct). This is just a +145 bps, steeper than the ‘07 year- 5.3 composite rate start, but with investment grade credit spreads narrowing a end spread of +98 bps, reflecting very 4.9 bit in December, further progress toward better functioning low short-term yields and expectations May-08 Jul-08 Oct-08 Dec-08 credit markets should be anticipated in Q1. of higher rates beginning later next yr. Please see the disclosure on page 2 of this report Data sources for all charts: Bloomberg Robert Podorefsky ( 617 ) 973 - 4091 Market Snapshot Disclaimer Disclaimer: This report is for information purposes only and is not intended as an offer, solicitation, or recommendation for the purchase or sale of a financial instrument or to effect a transaction. The information contained within this report has been obtained from and is based upon sources believed to be reliable. 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