Mortgage backed securities (MBS) prices are lower (rates higher), after three positive days, ahead of the FOMC policy statement due at 1115am pt and before the Treasury auction of $37 billion of 5yr notes; FNMA 5.0% coupon 101.20bps, -13bps and the low of the session. Today's 5yr note auction is the largest sale of the security since 1953. It is rare for a government auction and FOMC statement to come out on the same day, but it is neccessary due to a busy calendar of auctions to help finance the massive stimulus program. Volatility has been the market response to every Fed policy decision since December 16; selling off in January when the Fed failed to announce a debt buying program, rallying in March after release of the buyback program, sold off again in April when additional measures were not forthcoming. Stock markets, however, have responded each time with feverish buying. The concern is the liquidity injections and unprecedented borrowing will cause inflation to accelerate, endangering the prospects for a recovery. The Fed will probably reassure investors they can keep interest rates at record lows without igniting inflation, stressing the increasing slack in the economy will contain consumer prices into next year. The Fed is scheduled to purchase long term securities tomorrow and will announce next two weeks schedule of debt buybacks at noon pt today. The Mortgage Bankers Association weekly survey shows purchase applications jumped 7%, a solid improvement but from a depressed level. Refinance applications also rose 6% with activity tied to a turn back down for mortgage rates. Durable Goods Orders unexpectedly jumped 1.8% in May showing broad based strength, well above the market consensus of a 0.5% gain. The rebound in new orders was widespread, led by machinery and transportation. Excluding the transportation component, new orders posted a 1.1% rise. Year over year new orders for durable goods are down 23.3%. The gains will take time to impact production, but adds to the argument that the recession is near bottom. New Home Sales unexpectedly fell 0.6% in May to an annual pace of 342K from a revised lower 344K last month. Builder discounts failed to keep pace with the foreclosure driven slump in prices. The median sales price fell 3.4% from a year ago, but was up 4.2% from a month ago, to $221,600. Sales were down 33% from May 2008 and builders have 292K houses on the market, fewest since 2001, representing 10.2 months of supply at current pace.