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.