Friday, April 24, 2009

Players in the credit market will likely spend the balance of the day squaring up their positions and preparing for the onslaught of a record setting $101 billion worth of supply from the Treasury Department next week.

Uncle Sam will be looking to borrow $40 billion in the form of 2-year notes on Monday, $35 billion in the form of 5-year notes on Tuesday and $26 billion in 7-year notes on Wednesday. While they are "on-a-roll" the Treasury Department will announce on Wednesday how much additional supply it intends to bring to the credit markets in the form of three- and 10-year notes and 30-year bonds during the first week of May.

It will be a minor miracle should the Fed manage to steer mortgage interest rates through this deluge of government borrowing without a suffering a nick or two on the current level of note rates. We all know the law of supply and demand - "in a free market place when supply outstrips demand, prices tend to fall". We also know that in the mortgage business when prices fall - rates rise.
I look for the upward pressure on mortgage interest rates to be a bit more intense during the coming week given this morning's news of a sharp rise in Chinese gold reserves. The big "so what" factor here is that swelling Chinese gold reserves probably represent a new strategy of diversification by China - which by extension could logically mean the Chinese will be buying relatively less in the form of US Treasuries obligations in the future. Granted the Fed currently has the financial firepower to take up some of the slack caused by the potential of reduced Treasury auction participation by the Chinese - but only for a limited amount of time. You can be this event will be closely monitored for further developments by mortgage investors. You can also bet mortgage investors will likely be very hesitant to push mortgage interest rates sharply lower until the Treasury auctions of the next two weeks are complete -- and the participation levels of foreign investors can be clearly assessed.

Next week's calendar is action packed. In terms of macro-economic data Wednesday's revised first-quarter Gross Domestic Product figure and Thursday's measure of inflation pressure at the consumer level (the personal consumption index -- embedded in the March personal income and spending report) will draw the lion's share of attention from mortgage investors. These economic reports will probably be sharply overshadowed by the aforementioned three-day Treasury auctions. As if the data and auction schedule were not enough for one week - the Federal Open Market Committee will gather for a two-day meeting on Tuesday and Wednesday.

It is a very close call, but there is or are reason(s) to believe the stock market may experience a heavy round of profit-taking on or about Wednesday, April 29th. If the assessment proves accurate, the prospect for steady to fractionally lower mortgage interest rates into the second week of May.