Mortgage investors will likely remain in their foxholes with their helmets on and their heads down as Uncle Sam dominates the credit markets with a four-part borrowing spree over the course of the first four-days of this week. The action starts with today's sale of $7 billion 30-year inflation indexed bonds followed by $37 billion of 2-year notes tomorrow, $36 billion of 5-year notes on Wednesday and $37 billion of 7-year notes on Thursday.
Treasury obligations of every description have been rallying powerfully since mid-April as the likelihood of an economic recovery from the deepest recession in decades continues to fade. As the economy cools so does the threat of inflation - a condition which simultaneously reduces the availability of alternatives for investors looking for safe returns. The "so what" factor here is significant.
Investors' appetite for dollar denominated assets like Treasury obligations and mortgage-backed securities will be sharply tested this week since prices for these debt offerings are either trading at, or very near all-time their historical highs.
While the auctions are expected to draw decent demand - it is highly likely the majority of mortgage investors will take a defensive "wait-and-see" approach before giving consideration to pushing rates noticeably lower from current levels. Investors who have completed more than a week in the "biz" tend to be collectively and individually aware that markets have a nasty habit of almost always crashing down -- and seldom do they ever crash up.
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