Credit markets are suffering a bad case of indigestion this morning after investors were called on to gobble up $67 billion of government debt together with a record setting supply of corporate debt issues.
The selling pressure we are experiencing today appears to be driven by two general influences; (1) the temporary consequences of short-term technical factors rather than a major shift in investors' view of the broad economy, and (2) the impact of a number of traders taking the past two days off to celebrate the Jewish New Year with their families.
Buyers, particularly money managers and foreign central banks appear to be nibbling a little after prices of both Treasury debt obligations and agency eligible mortgage-backed securities have fallen for two consecutive days. The demand from these buyers so far this morning has only been sufficient to drive prices off of their intraday lows -- but still remains too soft to do much else.
Where we go from here will depend in part on next week's run of macro-economic data. Should Monday's July Retail Sales figures together with in inflation story contained in Thursday's July Producer Price Index and Friday's July Consumer Price Index exceed current expectations -- it will likely be difficult if not impossible for mortgage interest rates to move lower from current levels.
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