As the fixed-rate 30-year mortgage rate dipped below 8% last week for the first time in a long while, market participants were saying that they would be very surprised if the Federal Open Markets Committee (FOMC) raised the federal funds rate at this week's meeting.

"Nobody is expecting them to do anything," said Robert Calhoun, co-director of research at fixed-income specialists Tattersall Advisory Group. "I also heard that the upcoming employment report is going to be somewhat weak."

"The market would be astonished if they move at this meeting and Greenspan doesn't like to astonish the market," added Art Frank, head of mortgage research at Nomura Securities. "The consensus is certainly that they will not do anything in August, but there is a growing feeling among investors that they might not move at all this year."

Indeed, an October rise in rates is a tough thing to do at the height of a presidential election. In 1988, another election year, when the Fed was in a rate-raising mode, it raised them in September and stood aside until after the election.

"The long-end of the Treasury curve and mortgages have done pretty well," Frank added. "Mortgages have traced the 10-year bond closely this week and yields have come down along with the 10-year."

Moreover, there has been a lot of evidence that there has been a slowdown in the U.S. economy. According to sources, there have recently been some encouraging numbers in terms of productivity gains, which has been a big focus for Alan Greenspan. The employment cost index has not been edging up and yet productivity has remained at a quick pace of growth.

"This fits right in with what he told the market a month ago," noted Michael Hoeh, head portfolio manager at Dreyfus Corp. "It will be relatively smooth sailing at this meeting, but perhaps a little more uncertain beyond that. There is the political pressure of the election, and there could be some real inflation spikes in the next couple of months."

For instance, commodity prices have become potential problems, and oil is back to above $31 a barrel, so any significant rise at this point could factor into some real inflation in the U.S. economy.

However, the Bank of Japan recently raised its rates at a time when economically there is not a lot of pressure on Japan's economy, so that could possibly help the U.S. economy in some way.

"If [Japan] slows its recovery down, it will be a positive on restraining U.S. growth from getting out of control," said an MBS investor. "But oil creeping up the way it has is probably the biggest risk to any Fed activity going forward."

"Things will be better when we see the curve get to more of a normal shape, as well as the swaps rate curve," Hoeh added. "By the end of the year, we'll have mortgage rates lower than we have today - not necessarily a strong rally in the Treasury market, but a normalization of the yield curve will help mortgage spreads and mortgage rates."

Hoeh predicted that it is more likely that the short-end will rally, which is relatively good for the swap market, though the 10-year Treasury will probably not be significantly different - hovering between 5.8% and 6%.

CMBS Deals Price

Two commercial mortgage-backed securities deal priced last week (see page 8). The Salomon Smith Barney conduit priced right on top of other recent conduit deals, and market players said it was a strong showing, considering that it priced at the same levels as the previous week's GMAC deal, which had a much higher multifamily percentage.

"Typically that would make the sale of the 10-year, AAA piece more difficult, but in fact the Salomon deal had good distribution, and there was not a lot in the market to take the focus away from it" said a CMBS trader. "It priced around Swaps plus 39, where a lot of recent deals by higher tier issuer price, and it was well distributed to a lot of accounts."

For Lehman Brothers' 1301 Ave. of the Americas transaction, the 3.5-year triple-A priced at Swaps plus 24 while the 4.9-year, triple-A piece priced at Swaps plus 34. Typically triple-A's on single-asset deals don't go that well because they are smaller and don't offer the same type of liquidity as the intended buyers would want.

"But a four basis point concession is good," said the trader. "There are deals that have priced wider than that at the triple-A level."

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