Subprime continues to hover over MBS, keeping volume below normal. Two weeks ago, it was the rating agencies placing several billion dollars of subprime RMBS on CreditWatch negative. Last week started out with another flight to quality in Treasurys related to declines in ABX indices.

Some of this was reversed on Tuesday as equities rallied to record highs on favorable earnings reports, a tame PPI report, and better-than-expected industrial production. The flight to quality was renewed in the overnight markets on Tuesday and continued into Wednesday morning's session as the market digested the news about the values of the two Bear Stearns subprime hedge funds. The firm reported that the less leveraged fund - the High-Grade Structured Credit Strategies Fund - lost 91% of its value as of the end of June, while the other fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, was worthless.

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