Investors around the world are swarming into the relative safe haven of Treasury obligations as the global economy continues to show signs of cooling. The yield on 2-year notes touched a new historical low earlier today at 2.687%. This new round of "flight-to-quality" buying was ignited by yesterday's surprise move by the Fed to begin a modified stimulus program by reinvesting the proceeds their portfolio of maturing mortgage-backed securities into longer-dated Treasury obligations.
The projected purchasing power the Fed is expected to deploy next year is projected be about $200 billion - certainly a big number to you and me - but a fairly modest sum in terms of its influence in the Treasury market. The latest guesstimates I've seen suggest the new round of buying by the Fed will help hold Treasury yields (and by extension mortgage interest rates) about 50 basis-points lower than they might have otherwise been. Nice - but certainly not as earthshaking as some of the media talking heads are trying to make it out to be.
I'll be particularly interested to see how the Fed's new program influences bank lending. Banks, especially big money center banks, have curtailed much of their normal lending operations in favor of engaging in very profitable "carry trades" - a transaction in which the bank borrows short-term money from the Federal Reserve near 0% and invests the loan proceeds in longer-dated Treasury obligations at 2+% -- making a very handsome, no-risk return in the process. That is a heck-of-a-deal for the bank - but it significantly retards growth for the broader economy.
If the Fed successfully squeezes a large part of the profit out of the "carry trade" by keeping long-term interest rates low -- banks will ultimately go looking for the higher returns to be found providing financing for the growth of the overall economy. We'll see is this scenario works out - but it is possible the Fed may have indeed engineered a process to get the engine of economic growth restarted.
As they do every Wednesday, the Mortgage Bankers of America have released their mortgage application survey for the week ended August 6th. The overall index, which includes both purchase and refinance loan requests, climbed 0.6% higher for the week. Refinance demand was 0.6% while purchase demand edged up by 0.3%. The contract rate for 30-year fixed-rate mortgages (a value which excludes lender fees and points) fell to 4.57%, the lowest ever recorded by the MBA in 20-years of record keeping.
Uncle Sam will be in the credit markets today conducting an auction of a $24 billion bundle of 10-year notes. The sale is expected to draw decent demand from both domestic and global investors alike. If so, this event will not likely exert significant influence on the direction of mortgage interest rates one way or the other.
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