Tuesday, October 12, 2010

The two strongest influences on the direction of mortgage interest rates today will be investor reaction to the text and tone of the minutes from the Federal Open Market Committee meeting held on September 21st - and the results of the Treasury's 3-year note auction. At 1:00 p.m. ET the Treasury Department will drop the gavel on the sale of $32 billion worth of three-year notes and an hour later the minutes of the September Fed meeting will hit the news wires.


Most analysts believe domestic and foreign investors will show a strong bidding appetite for today's 3-year note offering despite record low yields. Cash managers will look to stash their money in these relatively short-term securities since the economy looks doomed to many more months of puny growth. Traders making bets that the Federal Reserve will launch another big direct purchase program before the end of the year will also not likely be shy with their bids at this afternoon's auction. Look for this event to be mortgage market neutral.



The minutes of the September 21st Fed meeting may reflect some divisions among central bankers over whether to launch another big round of direct Treasury debt purchases. Investors seem firmly convinced that the dissenters will be voted down -- and Fed Chairman Bernanke and other more aggressive members of the Federal Open Market Committee will pull the quantitative easing trigger, probably as soon as their next meeting on November 2nd and 3rd. While action from the Fed seems almost assured, don't bank on the Fed performing major miracles for the mortgage market. They will likely begin rather small, particularly since this tactic's effectiveness is still highly debatable. Most observers believe the Fed will launch their new initiative by buying $80 to $100 billion worth of Treasury debt over the six weeks between each Open Market Committee meeting. At that pace, the Fed's so called "QE2" economic stimulus plan will not likely drive mortgage interest rates much lower than current levels. Don't lose sight of the fact that if the Fed is successful in stimulating economic activity through this new effort - the attendant rise in inflation pressures will almost certainly serve to tilt the trend trajectory of mortgage interest rates in favor of higher rates and lower investor prices