Monday, June 29, 2009

Trading activity is light this morning in the mortgage market. Investors are uninspired to do much of anything with a large number of them choosing to keep their hands in their pockets as the 2^nd-quarter and the first-half of 2009 wind down. The majority of market participants will likely approach Thursday's nonfarm payroll data cautiously as well. No sense in taking a chance of getting burned by a potential "surprise" payroll number prior to a three-day weekend.

Investors have already priced in expectations the number of jobs lost in June will match or exceed the consensus estimate of 355,000. The national jobless rate is projected to ratchet up to 9.6% and that view is also reflected in current prices. All will be well in the mortgage market as long as the actual numbers match or show an even worse picture of the labor sector than investors have already cranked in to their pricing models. That is one side of a two sided coin.

The other possibility is that the actual numbers show a labor sector stronger than the majority of market participants anticipated. If that's the case, Thursday's payroll data will immediately light a very short fuse on a very powerful firecracker - resulting in a mad scramble by investors to get out of the way before they get financially singed by the "hot" economic news. Such a condition, should it develop, almost always results in higher mortgage interest rates.

Trading action in the stock markets will be the "wild card" in all of this. There are reasons to believe the Dow and NASDAQ are becoming increasingly vulnerable to a multi-day downside price correction. Should such an event occur, capital fleeing falling stock prices will tend to flow to the relative safe haven of Treasury obligations and mortgage-backed securities. This so called "flight-to-quality" is generally supportive of steady to fractionally lower mortgage interest rates. From a timing perspective - chances are good the stock markets will put in a multi-day price high on, or before July 8^th.

Friday, June 26, 2009

Trading activity is light this morning in the mortgage market with the action primary dominated by traders looking to take profits after this week's 100 basis-point rally. The strong improvement in the mortgage market over the past five trading sessions was driven by the unexpectedly robust demand for 2-, 5- and 7-year notes during the three-part Treasury auction that wrapped up yesterday afternoon. This is the first-time this year when the month-end Treasury auction did not cause a sharp sell-off in the credit markets.

Mortgage investors were relieved by the inflation numbers contained in this morning's May Income and Spending report from the Commerce Department. Personal incomes soared 1.4% last month as social benefit payments flowing from the government's massive economic stimulus package worked their way into the data. Excluding the impact of the stimulus package, disposable incomes rose a more humble 0.2%. Consumer spending during May rose 0.3% -- its first monthly increase since February.

The best news of all was found in the personal consumption expenditure index component of the report, a measure of inflation closely watched by the Fed. This gauge of inflation pressures at the consumer level rose a very modest 0.1% last month, its smallest monthly gain since records began in 1959. On a year-over-year basis the personal consumption expenditure index is up a very modest 1.8%.

The coming holiday shortened week will start off slow - but will end with a bang. The calendar is completely void of economic news until Wednesday morning's release of the Institute of Supply Management report on last month's activity levels in the nation's manufacturing sector. The current consensus among economists is that while activity probably improved during the month of May - it won't be high enough to suggest a recovery in the sector has begun in earnest.

On Thursday the Labor Department will release the June nonfarm payroll figures with most analysts anticipating a headline number showing a loss of 355,000 jobs as the national unemployment rate inches up to 9.6%.

Mortgage investors have already priced in these expectations so -- should the consensus estimates prove generally accurate -- the impact on the direction of mortgage interest rates will likely be negligible. In the unlikely event the Institute of Supply Management's index of manufacturing activity exceeds 45.5% and/or last month's job losses prove to be less severe than projected - mortgage interest rates will almost certainly creep higher into the Fourth of July weekend (the mortgage market will be closed on Friday, July 3^rd).

Thursday, June 25, 2009

The mortgage market got off to a nice little rallying start this morning following the Labor Department's announcement that the number of Americans filing first-time claims rose by an unexpected 15,000 during the week ended June 20^th. The four-week moving average of jobless claims, a value that smoothes out the volatility in the raw weekly numbers, rose a mere 500.

The true underlying health of the labor sector is a huge question in mortgage investors' minds. If the labor sector is really weaker than most now believe - the economy will sag further. In the convoluted world of credit markets a deteriorating labor sector tends to be supportive of steady to perhaps fractionally lower mortgage interest rates. On the other hand, if the labor sector is stronger than anticipated - with bankruptcies at General Motors and Chrysler Group together with normal model year retooling furloughs and standard end-of-the-year layoffs in the nation's schools creating a noticeable but temporary upward skew in the statistics -- the return to a steady-to-lower trending pattern of data in the labor sector would almost certainly put upward pressure on mortgage interest rates. Unsure which of these two scenarios will prove to be the most accurate - but I do know for a fact investors will be keenly attuned to this economic metric over the course of next three- to four-weeks for hints indicating a shift in the labor market trend.

In a separate report the government announced first-quarter Gross Domestic Product, a statistical measure of the value of all the goods and services produced within the country's borders, dropped at a 5.5% annual rate, after shrinking 6.3% in the fourth-quarter of last year and 0.5% in the third-quarter. The Commerce Department's original estimate of Gross Domestic Product was -6.1%, revised to -5.7% and then to the current -5.5% which will not be revised again. For reasons of their own, credit markets shrugged off the substantial quarter-over-quarter improvement embedded into today's measure of domestic economic activity. It is highly unlikely mortgage investors will continue to be so nonchalant should the second-quarter Gross Domestic Product figure show additional improvement. It will be another thirty-days or so before this particular issue rolls around again into such sharp focus -- the government will make public their initial estimate of second-quarter Gross Domestic Product performance on July 30^th.

Most observers believe today's 7-year note offering will be well bid by domestic and foreign investors alike. If so, this event will likely have little, if any noticeable impact on the trend trajectory of mortgage interest rates today. A poorly bid 7-year note auction, a condition that would require the government to offer yet higher yields to attract the required capital, will almost certainly cause disappointed mortgage investors to nudge rates fractionally higher.

Wednesday, June 24, 2009

Trading activity in the mortgage market is light this morning as investors pace the floor awaiting the results of today's record-setting $37 billion 5-year note auction (concludes at 1:00 p.m. ET). This big debt offering will be followed within roughly an hour by the much anticipated release of the post-meeting statement from the Federal Open Market Committee -- expected at 2:15 p.m. ET.

Most observers believe today's 5-year note offering will be well bid by domestic and foreign investors alike. If so, this event will likely have little, if any noticeable impact on the trend trajectory of mortgage interest rates today. A poorly bid 5-year note auction, a condition that would require the government to offer yet higher yields to attract the required capital, will almost certainly cause disappointed mortgage investors to nudge rates fractionally higher.

The likelihood the members of the Federal Open Market Committee will choose to leave their benchmark fed funds rate at zero following the conclusion of their meeting this afternoon is a virtual "no-brainer." Such an outcome is already priced into the mortgage market. Investors, however, will be firmly focused on the Fed's post-meeting statement for any hint the central bank intends to ramp-up their current authorization for the direct purchase of $1.25 trillion of agency mortgage-backed securities, $300 billion of Treasury debt obligations and $200 billion of the corporate debt obligations of Fannie Mae and Freddie Mac.

So far, the Fed has burned through roughly 50% of their current interest rate supporting direct-purchase "war chest." The majority of market analysts tend to believe the Fed will choose to make no change to the size of their direct-purchase checkbook this time around - preferring to take a "wait-and-see" approach -- before giving any real consideration to printing up another gargantuan batch of dollars to temporarily send interest rates in general, and mortgage interest rates in particular, a few basis points lower.

If this assessment proves accurate -- look for mortgage interest rates to drift fractionally higher for the balance of the week. In the unlikely case the Fed surprises the market place with the announcement of a notable expansion of their quantitative easing programs -- expect mortgage interest rates to slide incrementally lower from current levels.

On a different subject -- the Commerce Department reported this morning that new orders for long-lasting manufactured goods rose by a much-stronger-than-expected 1.8% in May - three times the 0.6% gain most economists had expected to see. New orders excluding transportation advanced 1.1% last month, well ahead of the consensus estimate for an improvement of 0.4%. In a separate report the Commerce Department said new home sales slipped 0.6% lower in May as the median sales price rose to $221,600 from the April level of $212,200. The Mortgage Bankers of America chimed in with their weekly index of loan applications -- which rose 6.6% during the week ended June 19 - after slowing to a pace not seen since last November. Purchase applications were up 7.3% while refinance applications increased by 5.9%. This collective body of data simply added to a growing collection of statistics suggesting the economy is stabilizing.

Mortgage investors are keenly aware that there is a big difference between an economy that is stabilizing -- and an economic recovery. Until/less the macro-economic data trends improve on a multiple month-over-month basis -- the upward pressure stronger-than-expected economic data will exert on the direction of mortgage interest rates will continue to be largely muted.

Monday, June 22, 2009

The prospect for notably lower mortgage interest rates has hit a wall-of-worry created by investors' jitters over this week's record amount of supply Uncle Sam plans to dump into the credit markets. The Treasury Department intends to sell $40 billion of 2-year notes on Tuesday, $37 billion of 5-year notes on Wednesday and $27 billion of 7-year notes on Thursday (for a total of $104 billion).

Investors will comb carefully through Wednesday afternoon's post-meeting statement from the Federal Open Market Committee. Market participants will consider carefully the Fed's guidance on growth and they will hunt diligently for any hint the central bank intends to expand its $300 billion program for the direct purchase of Treasury debt obligations.

Fed Chairman Bernanke and his fellow committee members will be walking a tight-rope as they craft the written statement of their view of the economy and their analysis of the appropriate blend of monetary and credit policy. The majority of economists see zero chance the Fed will raise its benchmark short-term fed fund rate as Mr. Bernanke and company simultaneously attempt to nurture hopes the end of the recession is near. The chances are high that the Fed's post-meeting statement will come off as a mixed message - especially to fixed-income investor investment community. These market participants are hyper-sensitive to the idea that improving economic activity leads to increased demand for capital - which in-turn leads to higher interest rates. In my experience, when investors are unsettled about a message from the Fed, they tend to take a "safe-rather-than-sorry" approach to their mortgage pipeline risk management strategies. In this case -- if history repeats itself -- look for mortgage interest rates to struggle to make any headway toward notably lower levels this week.

Worth repeating (From Friday's commentary - with update): The stock market's performance will almost certainly exert some influence on the direction of mortgage interest rates over the next five business days. Last week when stock prices retreated - mortgage interest rates crept incrementally lower - and when stock prices showed some strength -- mortgage rates edged higher. There is little reason to expect this relationship will be any different this week. As I pointed out in Friday's commentary from a technical perspective the Dow will likely find it very difficult to move above the 8800 mark (last week's intraday high was 8798) and the NASDAQ will find it challenging if not impossible to push through the 1865 or so mark (last week's intraday high was 1838). I see reason to believe the stock markets will begin to loose upward momentum during the Tuesday - Thursday time frame this week. If my assessment proves accurate weakness in the equity market will serve to mute some, but not necessarily all of the upward pressure this week's Treasury auctions will exert on the trend trajectory of mortgage interest rates.

Friday, June 19, 2009

The prospect for notably lower mortgage interest rates has hit a wall-of-worry created by investors' jitters over next week's record amount of supply Uncle Sam plans to dump into the credit markets. The Treasury Department intends to sell $40 billion of 2-year notes on Tuesday, $37 billion of 5-year notes on Wednesday and $27 billion of 7-year notes on Thursday (for a total of $104 billion). The upcoming note sales will top the previous record of $101 billion sold in auctions in late April and May.

The stock market's performance may also exert some influence on the direction of mortgage interest rates. This week when stock prices retreated - mortgage interest rates crept incrementally lower - and when stock prices showed some strength -- mortgage rates edged higher. There is little reason to expect this relationship will be any different next week. From a technical perspective, it appears that the Dow will likely find it very difficult to move above the 8800 mark and the NASDAQ will find it challenging if not impossible to push through the 1865 or so mark. There are reasons to believe the stock markets will begin to loose upward momentum during the Tuesday - Thursday time frame next week. If this assessment proves accurate weakness in the equity market will serve to mute some of the upward pressure the Treasury auctions will exert on the trend trajectory of mortgage interest rates.

The highlight of next week's calendar will be the Federal Open Market Committee meeting scheduled for Tuesday and Wednesday. In their post-meeting statement (expected at 2:15 p.m. Wednesday afternoon) the Fed will likely emphasize their intent to maintain their zero interest-rate policy for short-term interest rates for the foreseeable future and underscore their already announced plans to buy longer-dated Treasury obligations and mortgage-backed securities. It is highly likely Fed Chairman Bernanke and his fellow central bankers will go to great lengths to emphasize that the economy's rate of deterioration has declined substantially -- with preliminary signs of an end to the recession making timid appearances through a number of different economic metrics. In the end, the members of the committee will likely choose to leave both monetary policy and credit policy (direct-purchase authorizations) unchanged - with the latter decision almost sure to exert some modest upward pressure on mortgage interest.

Thursday, June 18, 2009

It is a familiar pattern.

Once again bond and mortgage-backed security prices are tumbling lower out-of-the-gate as primary dealers actively "cheapen-up" the credit markets in front of a deluge of new incoming supply from the government.

Next week, beginning on Tuesday and running through Thursday, Uncle Sam will be in the credit markets looking to borrow roughly $101 billion in the form of two-, five- and seven-year Treasury notes. As dealers scramble to make space in their already overflowing portfolios many find it necessary to sell parts of their existing stock of Treasury securities -- compounding the existing imbalance between supply and demand. As you well know-- when supply exceeds demand -- prices fall - and in our world when prices fall - interest rates rise.

The Labor Department reported this morning that first-time jobless benefit claims for the week ended June 13^th rose by 3,000. That particular snippet of macro-economic data was generally considered inconsequential as far as most mortgage-investors were concerned. Investors weren't so quick to wave off additional detail in the report that showed the number of people staying on the benefit rolls after collecting an initial week of benefits fell by 148,000, marking the first weekly improvement in this measure of labor market conditions since January. In another sign labor market weakness may be easing, the 4-week moving average for new claims, considered to be a better gauge of underlying trends because it smoothes out week-to-week volatility, dropped to its lowest level since February 14^th.

The initial jobless claims data did not independently create this morning's selling pressure - it just gave investors another reason not to buy.

Wednesday, June 17, 2009

The Labor Department reported this morning that aggregate inflation pressures at the consumer level have fallen to their lowest levels since 1950. On a month-over-month basis the May Consumer Price Index rose a very modest 0.1% while the core rate (a value that excludes the more volatile food and energy components) rose by a matching mortgage market friendly 0.1%.

There is a tremendous amount of slack in every current measure of economic activity - a condition that suggests inflation will not likely be a major threat to the trend trajectory of mortgage interest rates for some time to come. That is not to say other conditions - like major disruptions created by unrelenting government supply issues won't upset the mortgage market apple cart in the near future - but inflation concerns probably won't be a major determinant of mortgage interest rates trends through at least the end of the year.


Interest rates in general are being supported at fractionally lower levels in this morning's early going by the repurchase program of the Federal Reserve. The central bank is an active buyer of Treasury debt obligations maturing in seven- to 10-years. Even though the Fed has burned through a little more than 50% of their original allotment of $300 billion for the direct purchase of Treasury debt - they are still packing enough financial firepower to be considered a supportive influence for the prospects of steady to perhaps fractionally lower mortgage interest rates.


The Mortgage Bankers of America's index of loan applications fell for the fourth consecutive week. The MBA said during the week ended June 12th its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loan requests, fell by 15.8%. The purchase application index dropped by 3.5% while refinance requests were down by 23.3%. Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.50%, down 0.07% from the prior week -- and significantly below the year ago level of 6.57%.

6-9-09

Earlier this morning the Treasury Department gave 10 of the nation's biggest banks approval to pay back a combined $68 billion of taxpayer money pumped into them earlier this year to combat the credit crisis. The Treasury Department did not name the banks, but their names eventually will be published in routine Treasury reports. From a credit market perspective their names really don't matter - the fact that $68 billion is flowing back into the Treasury Department's financial war chest is viewed as reducing future borrowing needs - igniting a little round of price-improving bargain shopping in the credit markets this morning.

Many traders are milling around with their hands in their pockets as they await the results of Uncle Sam's $35 billion 3-year note auction. The auction will conclude at 1:00 p.m. ET. Most analysts are anticipating the bidding by both domestic and foreign investors to be solid. If that assessment proves accurate, this event will likely prove to be supportive of steady to perhaps fractionally lower mortgage interest rates.

Don't expect too much improvement today - mortgage investors remain extremely skittish regarding the impact tomorrow's $19 billion 10-year note offering and Thursday's $11 billion 30-year bond auction may have on the trend trajectory of mortgage interest rates. My personal opinion is that the yield on each of these securities has been ramped-up over the past five weeks to levels that will likely draw solid participation from buyers. If so, this scenario will be supportive of steady to fractionally lower mortgage interest rates. If my assessment proves to be off-base, expect mortgage investors to express their disappointment by pushing mortgage interest rates higher and prices lower.

For what it is worth, from a technical perspective the stock markets are starting to show signs that suggest a top may be imminent. Don't jump the gun on this one - but should a sell-off in the equities develop - it will almost certainly prove to a "shot-in-the-arm" for the prospects of lower mortgage interest rates as capital flows back into the "safe-haven" of Treasuries and mortgage-back securities.

Monday, June 8, 2009

Many have asked if there has every been a period of time when prices in the mortgage market have fallen more dramatically than they have during the 443+ basis point plunge recorded from May 21^st through the market close on Friday, June 5^th.

You may find it surprising to know that as recently as the two week period between 10/11/08 and 10/18/08 the Fannie Mae 4.5% 30-year mortgage-backed security plummeted over 500 basis points. The following two weeks it rallied 400 basis points -- before again slumping 350 basis points during the week of 11/1/08. Following the low set on 11/1/08 -- the Fannie Mae 4.5% 30-year mortgage-backed security rallied for more than 1000 basis points over the next seven weeks ended 12/20/08.

The real rarity in terms of price history here is there has only been one nine-week period (dating back to at least 2000) where the trading range (measured from high to low) of mortgage-backed security prices has been limited to 100 basis points or less -- and that one magical time period occurred between the week ended March 28, 2009 and the week ended May 23, 2009.

The "so what" factor here is that current price action in the mortgage market is, believe it or not, actually more the norm -- than the exception. I am certainly not suggesting any of us have to like the recent volatility - I am just respectfully suggesting we take just a moment to put the recent price swoon into its proper perspective -- as one of the ordinary dynamics of our business.

This week's $65 billion, three-part Treasury auction posses a significant threat to the prospects for steady to fractionally lower mortgage interest rates. I think it will be an exercise in futility to look for much, if anything in the way of rate sheet price improvements before the final gavel falls at 1:00 p.m. ET on Thursday at the conclusion of Uncle Sam's 30-year bond offering.

Thursday, June 4, 2009

Market participants are nervously awaiting the announcement from the Treasury Department regarding the size of next week's 3-part auction. Uncle Sam will be looking to borrow an expected $54 billion in the form of 3- and 10-year notes together with 30-year bonds. In the last 45 days global markets have been very hesitant to put their money into Treasury investments with maturities beyond 5-years. Mortgage investors fret that the government will be forced to push the yield on next week's 10-year note and 30-year bond offerings considerably higher in order to attract the required capital. If those fears are actualized, rising yields in the government debt markets will drag mortgage interest rates higher as well - and in light of those concerns - mortgage investors are taking a "better-safe-than-sorry" tact and pushing rates preemptively higher today.


I think it is worth noting that a lot of really positive news on the stabilization and imminent recovery of the global economy has been priced into the stock markets. The "worst case" scenario involving an economic nuclear winter for the industrialized nations may have been avoided, but the jury is still out on a self-sustaining return to long-term growth trends here and aboard. From this point forward the rising pace of government borrowing by Uncle Sam and other countries in the global marketplace will likely do little to aid recovery as the burden of the associated rise in consumer and business borrowing costs stymies the very growth governments were intending to generate. It is highly likely the current attempt by governments to borrow their respective economies into prosperity will fall far short of the intended results.


"What does this have to do with the current level of mortgage interest rates?" you might ask.

Potentially everything.

Rising borrowing costs increase operating expenses for business and households alike. Consumers with less money to spend buy fewer goods and services. Gross income for businesses falls as consumers' buying power erodes - causing corporate net incomes to plummet and stock prices to dive. Stock markets around the world are extremely vulnerable to a downward correction before the end of the month. If this assessment proves accurate, the resulting flight-to-quality rush of capital back into safe-haven investments like Treasury obligations and mortgage-backed securities will be strong enough to frame a ceiling over mortgage interest rates at roughly current levels. I'm not sure how much mortgage interest rates might improve -- but I do know unequivocally before any improvement in the level of mortgage interest rates can possibly begin - they have to first stop moving higher.

Wednesday, June 3, 2009

Trading action in the mortgage market is light in today's early going. The Fed purchased $7.5 billion of Treasury obligations maturing in 7- to 10-years out of the $21 billion broker/dealers had available to sell. The Fed spent $7.6 and $8.5 billion at their previous two buy-back operations for Treasury securities in this maturity range. The Fed did not completely "whiff" at this auction - but at the same time I think many had hoped they would be more aggressive buyers. I think this event could best be classified as mortgage market neutral to slightly unfriendly.

Fed Chairman Bernanke made a trip to Capitol Hill this morning to have a chat with the members of the House Budget Committee regarding the impact of the nation's burgeoning deficit on business and consumer interest rates. Mr. Bernanke warned members of the House Committee that rising U.S. debt is contributing to a spike in mortgage interest rates, and encouraged lawmakers to begin reining in the government's deficit spending now. The Fed Chairman said financial market conditions have improved, thanks in-part to the Fed's effort to restore lending, but he also noted the recent spike in yields on Treasury debt and fixed-rate mortgages. Since the Fed announced plans to directly purchase up to $300 billion in Treasury debt obligations - long-term yields have actually risen -- rather than fallen or stabilized as many had hoped. Despite the support from the Fed -- the gap between 2-year and 10-year yields has now climbed to a record level.

The "so what" factor from a mortgage originator perspective is significant. The prospect for a return to the high 4% range for 30-year fixed-rate mortgage is growing dimmer by the day. You can bet the Fed will do everything they can do to keep mortgage rates accommodative - and they may even add capital to their direct purchase "war chest" for mortgage-backed securities - but credit market conditions suggest it may be a very tall order indeed to expect the Fed's forthcoming efforts to drive mortgage rates all the way back to near record lows.
On a related note, the Mortgage Bankers of America said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, fell 16.2% during the week ended May 29th. Borrowing costs on a 30-year fixed-rate mortgage, excluding fees, average 5.25%, up 44 basis points from the previous week but remain well below the year-ago 6.17% level.

Tuesday, June 2, 2009

The early positive start to the day in the mortgage market was torpedoed by news from the National Association of Realtors indicating the Pending Home Sales Index rose 6.7% in April to 90.3 from 84.6 in March. It was the biggest monthly increase since October 2001 and it took the index 3.2% above its year earlier levels. The substantial improvement was credited to improved home affordability and a new government program that provides an $8,000 tax credit for first-time homebuyers. Participants in the mortgage market are concerned the stronger the economy in general becomes -- and the stronger the housing sector in particular becomes -- the less support will be required from the Fed.

There are those that believe all of this fretting over the pending homes sales index will likely prove nothing more than too much misplaced handwringing - but for the time being it was enough to chase the bargain hunters out of the mortgage market this morning which caused the early price gains to evaporate.

If the Fed chooses to flex their financial muscle tomorrow in an undeniable display of their commitment to keep borrowing interest rates for consumers and businesses low as they enter the credit markets to buy 7- and 10-year Treasury notes -- look for mortgage investors to get the message and nudge mortgage rates lower as well. We'll see - stay tuned!!

Monday, June 1, 2009

So which is it - are rates rising because the economic recovery is gaining noticeable traction or do rising rates mean the global investment community is worried about the deterioration in the creditworthiness of the U.S. as a debtor nation?

The Fed is not sure if one of these two dynamics is at play -- or if some other factor is creating all the volatility in the credit markets.

The idea that a major shift in investor sentiment has occurred regarding the budding economic recovery -- is an extremely weak one. It is true many economic measures have turned higher - but these improvements still leave many macro-economic measures only fractionally above all-time record lows recorded within the last six months. The vast majority of macro-economic indexes remain well below values normally associated with expansion.
The argument that the global investment community is loosing their appetite for dollar-denominated assets is weak as well.

Data shows international demand for American financial assets is as high as ever, even as the value of the dollar slides and the U.S. deficit expands. Data compiled by Bloomberg show the Federal Reserve's holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3% in May, the third most on record. The Treasury Department said bidding from foreigners was above average at last week's $101 billion three-part note auction. To lay last week's major swoon in the debt markets at the feet of massive incoming government supply misses a key point, the $2 trillion dollar supply inbound into the credit markets from Uncle Sam has been public knowledge for months, the likelihood that market participants just woke up to that fact last Wednesday is beyond ludicrous.

There are all kinds of suppositions floating among market participants regarding the cause(s) behind the swoon in the credit markets. There are an even larger number of theories focused on what the Fed should do to stem the crash and to push borrowing rates back to notably lower levels.

Many are suggesting the Fed needs to immediately expand their funding authorization for the direct purchase of Treasury debt obligations from its present level of $300 billion -- to $1 trillion dollars or more.

Others argue the Fed simply needs to make it abundantly clear to market participants that the central bank will hold their mortgage-backed security portfolio to maturity - reducing any threat to other mortgage investors that the government will become an aggressive seller of mortgage-backed securities somewhere down the road. Proponents of this argument believe that if this particular threat is eliminated -- one of the major root causes behind last week's crash in the mortgage market will be greatly reduced.

I have no idea what the "right answer" is - and I think it is a very safe bet to suggest the Fed is doing a lot of collective head scratching right now as well. Central bankers will not want to appear as though they are reacting to every market swing by doing something instantly-- for fear of losing creditability in the global investment community. If the capital for significant expansion of their direct purchase programs is going to be authorized -- and/or if they are going to make a dedicated commitment to hold their mortgage portfolio to maturity- and/or if they are going to do something not yet on investors radar screens - it won't likely happen in a breathless rush.

The next regularly scheduled Federal Open Market Committee meeting is set for June 23 - 24th. At least until then, like it or not, volatility levels in the mortgage market will almost certainly remain inordinately high