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.
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