Thursday, February 26, 2009

Thursday, February 26, 2009

A prospective deficit of as much as $1.75 trillion in President Obama's proposed budget for this fiscal year combined with the final auction in this week's record series of government debt sales are generating stiff-headwinds for the prospect of steady to fractionally lower mortgage interest rates in this morning's early going.

Earlier economic reports showing a weaker-than-expected decline in durable goods in January, higher-than-forecast weekly jobless claims figures and sagging New Home Sales last month have once again largely been ignored by mortgage investors as they deal with the massive credit market supply challenges created by Uncle Sam's unprecedented borrowing spree.

Currently, market participants are awaiting the results of the first 7-year note auction since 1993. The Treasury is looking to borrow $22 billion via this security. The success of this auction is clouded with uncertainty because no one knows how eagerly investors will flock to it. This instrument was used heavily as a hedging vehicle by the mortgage industry during its previous life - and it will be interesting to see if mortgage investors choose to use it for that purpose again.

Are people going to re-adapt to the 7-year note with enough immediate enthusiasm to take down $22 billion worth? Quite frankly, a tough one to predict right now. A solid 7-year note auction together with post-auction relief that Uncle Sam is out of the credit market - at least temporarily - will probably be enough to support steady to perhaps ever so fractionally lower interest rates through the end of the week. It is "wait-and-see" time until the 7-year note auction concludes at 1:00 p.m. ET today. Stay Tuned and hoep for the better...

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