Tuesday, January 26, 2010

Nervousness about the sustainability of the economic recovery combined with jitters about the health of our domestic stock markets and breaking news that Japan's sovereign debt rating may be downgraded in the face of massive deficits will likely combine to drive investors in droves to today's $44 billion two-year Treasury note auction. This sale is part of this week's $118 billion, three-part borrowing spree by Uncle Sam.



The Treasury Department is scheduled to sell an at-record $42 billion stack of 5-year notes tomorrow and a $32 billion bundle of 7-year notes on Thursday. An overall expectation among market participants is that all three debt offerings will be solidly bid. With all the economic and geopolitical uncertainty currently flowing through the market place - most investors with a dollar to spend in the Treasury market are likely going to invest in the shorter-end of the yield curve - rather than in a 10-year note or 30-year bond. Well bid auctions with solid foreign investor participation will not likely influence the direction of mortgage interest rates much one way or the other. In the off chance any one of these three auctions is deemed to have been poorly bid - defined by a higher yield and lower price - you can bet mortgage investors will likely push their rates higher as well.


The fact that the Fed will be holding a two-day monetary policy meeting right in the middle of Uncle Sam's borrowing spree is not helping lower trader anxiety levels. Mortgage investors are fretting about what the Fed may say about it's exist strategy from its emergency market measures. The Fed has essentially two responsibilities; promoting full employment and keeping inflation in check. The high jobless rate means the Fed is far from accomplishing its first goal while extremely benign inflation pressure are helping them achieve their second objective. Against this backdrop it is highly likely the Fed's post-meeting statement on Wednesday afternoon will include only minor changes to the December statement but will focus on the headwinds still facing the economy as it struggles to recover from the worst recession since World War II. At the end of the day - the probabilities are high that this event will exert little, if any significant influence on the trend trajectory of mortgage interest rates.



This week's Federal Open Market Committee meeting is at bit more dramatic than normal due to the fact that Fed Chairman Ben Bernanke's path to a second term has taken an unexpected, and potentially dangerous turn for the worse. If Bernanke is not confirmed before his current term expires on January 31st - the effect on mortgage interest rates will likely be swift - and unpleasant. A Congressional refusal to give Bernanke a second term will likely be perceived by credit market participants as politicizing decisions on monetary policy, a condition sure to negatively impact the creditability of the central bank with domestic and foreign investors alike.


The latest buzz-on-the-street suggests law makers are quickly coming to the realization that refusal to reseat Bernanke for a second term is a "slippery-slope" that is probably in their political best interest to avoid ahead of November's mid-term elections. An affirmative vote before the end of the week looks likely.