Tuesday, February 23, 2010

Three separate Treasury auctions and two days of Congressional testimony by Fed Chairman Bernanke will dominate the mortgage market for the balance of the week.



Uncle Sam will be in the credit market today peddling a $44 billion stack of 2-year notes. He will be back looking to sell a $42 billion pile of 5-year notes tomorrow followed by a $32 billion bundle of 7-year notes on Thursday. This onslaught of supply will test demand, particularly among foreign investors, who have started to show signs of moving away from short-term U.S. debt into higher-yielding assets.


The continuing debt crisis in Europe, especially as it relates to the sovereign debt of Greece, could bring jittery euro investors back to the relatively safe-haven of Treasury debt obligations and mortgage-backed securities. A well bid auction series this week will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates.


Pay attention here -- weakness in any one of this week's debt sales will push government debt yields higher - a condition almost certain to shove mortgage interest rates higher as well.


The other "wild card" event of the week for the mortgage market comes in the form of Fed Chairman Ben Bernanke's semi-annual monetary policy testimony before the House Financial Services Committee on Wednesday followed by a repeat performance in front of the Senate Banking Committee on Thursday. Mr. Bernanke will undoubtedly be grilled by the members of these two committees for the detail behind the surprise decision to raise the discount rate by 25 basis points. The move itself will likely not draw as much question and answer focus as will the timing of the move. Why did the Fed deem it necessary to raise the discount rate last week? Couldn't the move wait until the FOMC's next scheduled meeting on March 16th? And if not, why didn't the Fed make the move at its January 27th meeting? The probabilities are high that Mr. Bernanke's answer will be viewed as acceptable in the context of the Fed's overall plan to wrap up a number of stimulus programs scheduled for expiration in the next few months. If so, this event will undoubtedly draw a lot of attention -- but in the end the chances are high it will ultimately prove to have little bearing on the near-term direction of mortgage interest rates.