Mortgage investors begin the day dogged by the $63 billion of fresh supply that will be sloshing into the credit market from Uncle Sam over the course of the next three days. The 200+ point surge in stock prices right out of the gate this morning has caused some concern as well.
If major stock markets post solid gains this week the government's auction of $34 billion of 3-year notes today, tomorrow's $18 billion offering of 10-year notes and Thursday's $11 billion of 30-year bonds will likely be poorly bid as investors chase more "bang-for-their-buck" through equity (stock) purchases. Should this scenario develop - look for mortgage interest rates to edge higher as the week progresses. That's the bad news.
The good news is that the Fed still has roughly $310 billion of the original $500 billion it was allocated in January for the direct purchase of mortgage-backed securities. If mortgage interest rates begin to ratchet up too sharply you can bet Fed Chairman Bernanke will instruct his agents to retard this upward movement by entering the mortgage-backed securities market as aggressive buyers. It is worth noting that this strategy was never designed to move mortgage interest rates down to some specified level (remember the 4.0% 30-year fixed-rate rumors). The money the Fed has in its back-pocket is there as a temporary counter-weight to the upward pressure the massive $2 trillion+ of new incoming supply from the Treasury will undeniably exert on mortgage interest rates.
It is still believed among many that by Memorial Day of this year the lowest mortgage interest rates in a generation will likely have come and gone.
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