As the Fed moved into a formal quantitative easing program with the purchase of up to $1.25 trillion in longer-dated Treasuries, agency debt and mortgage bonds, interest rates fell on several measures and could look to be declining further. The Fed said yesterday it would purchase an additional $750 billion of mortgage-backed securities from Fannie Mae, Freddie Mac and Ginnie Mae to support home lending.

Yield on 10-year Treasuries fell nearly 50 basis points to just over 2.50% on Wednesday after the FOMC statement, and that could drive rates lower on 30 year fixed rate mortgages. Rates for 30-year fixed home loans dropped to 4.98% this week, Freddie Mac said today. They may reach 4.5%, the lowest since WW II, over the next several weeks. The difference between rates on 30-year fixed mortgages and 10-year Treasuries was 2.1 percentage points (210 basis points) recently. That’s up from an average of 1.75 percentage points in the decade before the subprime mortgage market collapsed.

Mortgage applications in the U.S. increased last week as lower borrowing costs led to a surge in refinancing. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan rose 21% to 876.9 in the week ended March 13, the highest in two months.

There's still  a risk that defaults will rise, given that continuing unemployment claims rose to a new record high last week and are showing no signs of abating. Mortgage delinquencies increased to a seasonally adjusted 7.8% of all loans in the fourth quarter, the highest in records going back to 1972. Loans in foreclosure rose to 3.30%, also an all-time high.

Meanwhile, 3-month dollar LIBOR (London Interbank Offered Rate) fell by the most since Jan. 13 after the Federal Reserve said it will start buying Treasuries. The rate dropped six basis points to 1.23%, its seventh decline, according to the British Bankers’ Association. The Libor-OIS (Overnight Interest rate Swap) spread, a gauge of bank reluctance to lend, fell seven basis points to 100 basis points.

Three-month sterling Libor has declined 23 basis points since the Bank of England said it would start buying gilts March 5. The Libor rate for pounds fell eight basis points in the previous two-week period.

Asia-Pacific money market rates dropped and the cost of protecting bonds from default dropped on optimism the Fed’s plan to buy bonds will ease stress in credit markets.

Australia’s interbank lending rates declined 3 basis points to a record 3.01%. Japanese companies with the strongest credit ratings paid the least to borrow since May 2006. 

Citigroup plans to spend about $10 million on new offices for Chief Executive Officer Vikram Pandit and his lieutenants, after the U.S. government injected $45 billion of cash into the bank.

Affidavits filed with New York’s Department of Buildings show Citigroup expects to pay at least $3.2 million for basic construction such as wall removal, plumbing and fire safety. By the time architect’s fees and expenses such as furniture are added, the tally for the offices at the bank’s Park Avenue headquarters will be at least three times as high, according to a person familiar with the project. Citigroup said the project will help it save money over time.

Citigroup began planning the renovation last June and obtained demolition permits in September, before the bank received any bailout funds, said a person briefed on the process.

President Obama spoke out against inappropriate spending at banks on Jan. 23, following reports that former Merrill Lynch CEO John Thain incurred more than $1 million of expenses to redecorate his personal office at the firm. 

Top finance executives at General Electric said Thursday that even in the worst scenario for the U.S. economy its finance unit should manage to break even this year and avoid having to seek a capital infusion. The company in December had projected a profit for GE Capital this year.

Executives said GE Capital, the finance unit of General Electric, has sufficient capital to weather even the worst storms. We don't see a need where we would have to raise external capital, Chief Financial Officer Keith Sherin said.

We really think GE Capital is well positioned to continue to perform and outperform the competition, said Mike Neal, chief executive of GE Capital.

GE offered no new projection for earnings at GE Capital. Executives said the unit would generate between $2 billion and $2.5 billion in net income in 2009 if unemployment averages 8.4% this year and the U.S. economy shrinks by 2%.

In a more extreme recession, where unemployment averages 8.9% for the year and the economy shrinks 3.3%, GE said the finance unit would break even. Even under this more severe case, which would potentially cause our losses and impairments to increase significantly, GE Capital Finance would still essentially break even and not require additional capital, Mr. Neal said.