Tuesday, February 9, 2010

Different day - essentially the same story. The economic calendar is vacant once again today - leaving mortgage investors with little more than trading activity in the stock markets from which to take their directional cues for mortgage interest rates - at least through the conclusion of Uncle Sam's $40 billion 3-year note auction this afternoon at 1:00 p.m. ET. Look for higher stock prices to drag mortgage interest rates higher while lower stock prices will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates.



Uncle Sam will kick-off a three-day borrowing spree today with the sale of $40 billion worth of 3-year notes. The relatively short duration of these notes should draw strong participation levels from domestic as well as foreign investors. If so, this event will likely prove supportive of steady mortgage interest rates. Casting a shadow over the prospects for notably lower mortgage interest rates this week is tomorrow's $25 billion 10-year note auction followed by Thursday's $13 billion 30-year bond sale.



Persistent concerns over potential sovereign debt defaults by Greece and other debt-laden European nations - together with worries about the "contagion effect" such an event might create for the global economy as a whole - has the potential to create solid "flight-to-quality" demand for these two offerings. If so, this deluge of incoming longer-term debt supply from Uncle Sam will not likely move mortgage interest rates much one way or the other. There is a chance that prior to one or both of these sales the European Central Bank may announce a viable financial rescue plan has been developed for Greece and Portugal. If so, the immediate threat of a major upheaval in the collective European economy will fade - reducing the massive "flight-to-quality" buying spree currently supporting the Treasury market. If such a scenario develops - expect upward pressure on mortgage interest rates to increase.



Fed Chairman Bernanke is scheduled to testify before the House Financial Services Committee on Wednesday at 10:00 a.m. ET. The broad topic has to do with publicly exploring the Fed's wind-down plans for a number of existing stimulus programs - not the least of which is the Fed's direct mortgage-backed security purchase initiative set to expire at the end of March. Mortgage market participants will be listening intently for anything market moving - but they will likely hear little more than political posturing from committee members. For his part, Chairman Bernanke can be expected to do his level best to prevent monetary policy and the related strategies from becoming politicized. He is keenly aware history is strewn with lessons about the financial catastrophes that have befallen nations that travelled down the slippery slope of allowing politically motivated parties to set monetary policy. If the Fed appears in any way to be losing its independence -- expect mortgage investors to register their concern by pushing mortgage interest rates higher.

Both the headline figure and the component of the report excluding auto sales are expected to post modest gains after a surprising slump in December. The slight anticipated improvement for retail sales will likely be viewed as temporary since job creation remains dismal. If so, this event will tend to be mortgage interest rate neutral.