Friday, October 23, 2009

As the week winds down mortgage investors are putting the final touches on their risk management strategies in front of next week's record setting deluge of government debt.
Uncle Sam will be in the credit markets looking to borrow a record volume of $123 billion in the form of two-, five-, and seven-year notes in tandem with a batch of 5-year inflation protected securities. The coming week's round of government borrowing handily beats the previous record of $115 billion set in July. S

o far this year, the massive amount of supply Uncle Sam has pumped into the credit markets has been absorbed without much problem -- simply because there is a lot of cash out there looking for a safe home. If trading action in the equity market is wobbly next week - it is likely these government debt obligations will be well bid -- causing them to exert little, if any upward pressure on mortgage interest rates. As always there is a flip-side to every coin, weak bidding at next week's government debt sale will almost certainly leach into the mortgage market -- producing higher rates and notably lower prices. At this juncture, there is reason to consider this latter scenario to be a low probability outcome.


Next week's schedule of macro-economic data will almost surely draw more than a passing glance from mortgage investors - particularly Thursday's first estimate of third-quarter Gross Domestic Product (8:30 a.m. ET) and the core personal consumption and expenditure component of the September Income and Spending data to be released at 8:30 a.m. ET on Friday. The majority of economists expect economic growth during the third-quarter accelerated at a brisk 3.3% pace. Mortgage investors have already priced-in that forecast as well expectations the core rate of inflation as measured by the September personal consumption and expenditure index did not exceed 0.2%. Should the actual numbers match or fall below these consensus forecast values - look for these economic reports to have little, if any noticeably impact on the trend trajectory of mortgage interest rates.


Earlier this morning the National Association of Realtors reported existing homes sales - including single-family, townhomes, condos and co-ops - jumped 9.4% higher last month. Lawrence Yun, NAR chief economist, said, "Much of the momentum is from people responding to the first-time buyer tax credit, which is freeing many sellers to take a trade and buy another home." The Association's data shows first-time home buyers accounted for more than 45% of home sales during the past year. A separate set of data shows that distressed homes accounted for 29% of transactions in September. Mortgage investors largely discounted the big surge in September existing home sales - reasoning the trajectory of sales will slip notably lower in the fourth-quarter following the expiration of the first-time home-buyer program at the end of November.


Stock market investors are continuing to make strong bets that corporate earnings will continue to "surprise" to the high side of expectations. The earnings season is still very young - with the majority of companies still due to turn in their third-quarter financial performance report cards. If these remaining companies successfully follow the current pattern of posting better-than-expected earnings -- stock markets will likely find sufficient justification continue to rally at the expense of fractionally higher mortgage interest rates.


On the other hand, if the remaining companies fail to solidly beat current earnings expectations, their stock price will likely begin to fall. The larger the number of under-performing companies (as compared to analysts' expectations) the stronger the likelihood stock markets will roll-over into a heavy sell-off - a condition that will tend to be strongly supportive of steady to fractionally lower mortgage interest rates.