Many eyes are on the Fed meeting this week. "The pause in the campaign to normalize short-term rates that Fed Chairman Ben Bernanke suggested in April is now a fond memory. One by one Fed officials have picked up the inflation-fighting gauntlet, reinforcing the bond market's distaste for dovish talk and resistance to an end to the tightening cycle."

"'The more data you see the more it looks like a 5.50 percent (Federal Reserve funds rate) is going to happen at some point, with the housing data playing into the idea that the Fed will raise rates this week and again, in August' said Scott Gewirtz, head of Treasurys trading in New York."

"As the Federal Open Market Committee meets this week to increase interest rates for the 17th consecutive meeting, 6 in 10 investors say they think the Fed will increase interest rates too much too fast, leading to a recession, according to the June UBS/Gallup Index of Investor Optimism."

"This belief may be one reason why investor optimism has continued to decline and now stands at its lowest point this year. Rising interest rates may also help explain why investors have such a dim view of the residential real estate market nationwide."

"'The Fed’s really walking a tightrope,' said Scott Anderson, senior economist at Wells Fargo. 'If they go higher, all bets are off, and there’s a big risk of a more severe housing downturn.'"

"'Home sales are slowing, houses are sitting longer, and the number of properties on the market (is) at an all-time high,' said Doug Duncan, chief economist of the Mortgage Bankers Association. 'All of that is a recipe for a slowing market at a time when the Fed is raising interest rates and squeezing affordability.'"

The Treasury Department had this today. "U.S. mortgage finance giants Fannie Mae and Freddie Mac pose risks to financial systems that could hit primary dealers, tighten credit and reduce liquidity in markets, a Treasury Department official said on Monday."

"Emil Henry said the potential for spillover into financial markets from any crisis crisis at one of the government-sponsored mortgage finance enterprises (GSEs) is 'nothing short of breathtaking.'"

"Henry said risks from GSEs could conceivably match the scale of the 1998 meltdown of the Long Term Capital Management hedge fund."

"A deterioration in GSE financial conditions would almost certainly increase risk premiums and boost yields on GSE debt and mortgage-backed securities relative to Treasury yields and other benchmarks, he said. Primary dealers holding large positions in GSE debt or mortgage-backed securities could incur substantial losses, which would spill over into other markets, he said."