<p><br/></p><p class="MsoNormal"><b><i><font face="Arial" size="2"><span style="FONT-WEIGHT: bold; FONT-SIZE: 10pt; FONT-STYLE: italic; FONT-FAMILY: Arial;">In Rates – Interest Rates: The Teleological View<p></p></span></font></i></b></p><p class="MsoNormal"><font face="Arial" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Arial;">Interest rates are on a journey, but have not yet reached the goal.<p></p></span></font></p><p class="MsoNormal"><font face="Arial" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Arial;"><p>&nbsp;</p></span></font><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;">·</span></font><font size="2"><span style="FONT-SIZE: 10pt;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</span></font><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;">
</span></font><b><font face="Arial" size="2"><span style="FONT-WEIGHT: bold; FONT-SIZE: 10pt; FONT-FAMILY: Arial;">Economics – Recession Odds Increase But Inflation Risks Remain<p></p></span></font></b></p><p class="MsoNormal" style="MARGIN-LEFT: 0.25in;"><font face="Arial" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Arial;">We only hope that when inflation pressures become more manifest in the United States that the Federal Reserve reverses course and acts in a timely and decisive manner to contain these inflation pressures.<p></p></span></font></p><p class="MsoNormal" style="MARGIN-LEFT: 0.25in; TEXT-INDENT: -0.25in;"><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;"><p>&nbsp;</p></span></font><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;">·</span></font><font size="2"><span style="FONT-SIZE: 10pt;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</span></font><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;">
</span></font><b><font face="Arial" size="2"><span style="FONT-WEIGHT: bold; FONT-SIZE: 10pt; FONT-FAMILY: Arial;">Treasuries/Agencies – Bad News for the Agency Basis<p></p></span></font></b></p><p class="MsoNormal" style="MARGIN-LEFT: 0.25in;"><font face="Arial" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Arial;">Credit and a supply and demand mismatch in January forced agency spreads wider.&nbsp; That’s likely to stick around.<p></p></span></font></p><p class="MsoNormal" style="MARGIN-LEFT: 0.25in; TEXT-INDENT: -0.25in;"><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;"><p>&nbsp;</p></span></font><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;">·</span></font><font size="2"><span style="FONT-SIZE: 10pt;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</span></font><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;">
</span></font><b><font face="Arial" size="2"><span style="FONT-WEIGHT: bold; FONT-SIZE: 10pt; FONT-FAMILY: Arial;">Interest Rate Swaps/Options/Futures <p></p></span></font></b></p><p class="MsoNormal" style="MARGIN-LEFT: 0.5in; TEXT-INDENT: -0.25in;"><b><font face="Arial" size="2"><span style="FONT-WEIGHT: bold; FONT-SIZE: 10pt; FONT-FAMILY: Arial;">– &nbsp;&nbsp; Time for the Bear Steepener?<p></p></span></font></b></p><p class="MsoNormal" style="MARGIN-LEFT: 0.5in;"><font face="Arial" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Arial;">To steepen further, the curve may need higher rates in the long end. <p></p></span></font></p><p class="MsoNormal" style="MARGIN-LEFT: 0.5in;"><font face="Arial" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Arial;"><p></p></span></font></p><p class="MsoNormal" style="MARGIN-LEFT: 0.5in; TEXT-INDENT: -0.25in;"><b><font face="Arial" size="2"><span style="FONT-WEIGHT: bold; FONT-SIZE: 10pt; FONT-FAMILY: Arial;">– &nbsp;&nbsp; LIBOR Funding Issues Resurface<p></p></span></font></b></p><p class="MsoNormal" style="MARGIN-LEFT: 0.5in;"><font face="Arial" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Arial;">Funding concerns have been forcing 3m LIBOR tighter. We look at a March put tree to take advantage of this. <p></p></span></font></p><p class="MsoNormal" style="MARGIN-LEFT: 0.25in; TEXT-INDENT: -0.25in;"><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;"><p>&nbsp;</p></span></font><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;">·</span></font><font size="2"><span style="FONT-SIZE: 10pt;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</span></font><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;">
</span></font><b><font face="Arial" size="2"><span style="FONT-WEIGHT: bold; FONT-SIZE: 10pt; FONT-FAMILY: Arial;">Agency MBS – MBS Advantage: Where to Go When PACs Are at a Premium<p></p></span></font></b></p><p class="MsoNormal" style="MARGIN-LEFT: 0.25in;"><font face="Arial" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Arial;">Front-end sequentials backed by 15-year 4.5% collateral offer stability for investors worried about the call risk of premium PACs. <p></p></span></font></p><p class="MsoNormal" style="MARGIN-LEFT: 0.25in;"><font face="Arial" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Arial;"><p></p></span></font></p><p class="MsoNormal" style="MARGIN-LEFT: 0.25in; TEXT-INDENT: -0.25in;"><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;">·</span></font><font size="2"><span style="FONT-SIZE: 10pt;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</span></font><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;">
</span></font><b><font face="Arial" size="2"><span style="FONT-WEIGHT: bold; FONT-SIZE: 10pt; FONT-FAMILY: Arial;">ABS and Non-Agency MBS&nbsp;– If You Could Find It: Part II<p></p></span></font></b></p><p class="MsoNormal" style="MARGIN-LEFT: 0.25in;"><font face="Arial" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Arial;">Prime/jumbo MBS volume in 4Q07 was less than 10% of 1Q volume. Differences in the collateral mix do not appear to be as drastic as we observed in subprime. However, OCLTVs increased. <p></p></span></font></p><p class="MsoNormal" style="MARGIN-LEFT: 0.25in; TEXT-INDENT: -0.25in;"><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;"><p></p></span></font></p><p class="MsoNormal" style="MARGIN-LEFT: 0.25in; TEXT-INDENT: -0.25in;"><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;">·</span></font><font size="2"><span style="FONT-SIZE: 10pt;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</span></font><font face="Symbol" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Symbol;">
</span></font><b><font face="Arial" size="2"><span style="FONT-WEIGHT: bold; FONT-SIZE: 10pt; FONT-FAMILY: Arial;">CMBS – Headlines or Reality?<p></p></span></font></b></p><p class="MsoNormal" style="MARGIN-LEFT: 0.25in;"><font face="Arial" size="2"><span style="FONT-SIZE: 10pt; FONT-FAMILY: Arial;">We review recent headlines highlighting commercial real estate market dynamics and analyze BBB CMBS credit adjusted yields based on various cumulative loss scenarios. <p></p></span></font></p>