Mortgage investors are taking a cautious "wait-and-see" attitude in front of the Treasury Department's $25 billion 10-year note auction this afternoon. The ongoing saga surrounding the fiscal crisis in Greece initially sparked demand for dollar-denominated Treasury debt obligations as European investors looked for a safe-placed to park their capital to avoid getting caught in a potential meltdown of the European economy. The massive inflow of capital helped hold not only the yields on Treasury debt obligations down - but mortgage interest rates as well.
There is growing speculation that euro zone countries are on the verge of cobbling together a rescue package that will, at least temporarily, ensure that Greece averts financial disaster. The uncertainty swirling around this event will make it difficult for investors to know exactly how to bid at today's 10-year note auction. If a viable rescue plan is announced the international capital markets will breathe a sigh of relief and the safe haven appeal of dollar-denominated assets will fade - resulting in slumping prices. That's a condition that suggests investors should avoid bidding aggressively for today's offering from Uncle Sam. If that scenario plays out look for additional upward pressure on mortgage interest rates to develop this afternoon.
On the other hand - if it becomes apparent conditions within the structure of the European Union are going to prove to be an impediment to any bailout attempt (as some analysis are currently suggesting) - the prospects are high than massive amounts of additional capital will flow out of Europe into the relatively safe haven of dollar-denominated assets like Treasury obligations - a very strong argument for aggressively bidding at today's auction. If this scenario plays out look for mortgage interest rates to move sideways to perhaps fractionally lower by the end of the day.
In any case, I think you can bet your bottom-dollar that the majority of mortgage investors will choose to remain safely on the sidelines awaiting further developments regarding the attempts to rescue the sovereign debt of Greece from the clutches of default.
Fed Chairman Ben Bernanke and members of the House Financial Services Committee slogged through a blizzard to meet to discuss the Fed's strategies for winding down the multitude of fiscal stimulus programs currently under its control. Bernanke make it clear from the outset that the time for tightening monetary policy is still months away. Chairman Bernanke indicated when the time comes to beginning reducing the massive amount of stimulus that was injected into the financial system the Fed will likely move to increase the interest rate it pays on reserves member banks hold at the Federal Reserve.
Raising the interest rates on these deposits would encourage banks to park funds with the Fed, effectively taking the money out of circulation. Capital market participants appear to believe this first-move to be reasonable and functional judging by the relatively calm pace of trading during and following Mr. Bernanke's testimony. As this juncture I think it is safe to consider this event to be mortgage market neutral.
The only major economic report on tap this week will arrive tomorrow morning at 8:30 a.m. ET with the release of the January Retail Sales figures. 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.
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