Monday, February 23, 2009

It is going to be a busy week for investors. Uncle Sam will sell a record $94 billion of notes this week -- $40 billion of 2-year notes tomorrow, a record $32 billion of 5-year notes on Wednesday, and a record $22 billion of 7-year notes on Thursday.

Should it become necessary for the government to borrow billions more to nationalize one or more money-center banks - global investors will likely demand that the Treasury pay significantly higher yields for the required capital. The credit markets are already struggling under the weight of Uncle Sam's estimated $2.5 trillion borrowing need for fiscal year 2009.

The banking sector in general and Citigroup specifically will be one of the central focus points for mortgage investors as the week progresses. The Wall Street Journal reported this morning that Citigroup is in talks with the government that may lead to the U.S. converting its preferred shares in the lender into common equity, in an effort to help Citigroup reinforce its capital. Government officials are quick to say they have no interest in nationalizing any bank - but market participants aren't so sure partial state ownership is that much different from complete state ownership. Is it possible to be just a little bit pregnant? I'll keep you posted on this developing story and what its ramifications may have in store of the mortgage market.

Federal Reserve Chairman Ben Bernanke will be on Capitol Hill tomorrow and Wednesday for his semi-annual grilling on monetary policy issues by Congress. The members of the Senate Banking Committee and the House Finance Committee will once again engage in a round of huffing and puffing on a subject few of them know much about - while Bernanke remains unflappable and unlikely to make any new announcement about the Fed's extensive financial rescue efforts. Expect a ton of theater here - but substance will probably be limited if not completely absent.

As I mentioned on Friday - I think it will take an event -- like a major swoon in the stock markets -- to create enough "flight-to-quality" buying interest to support a move to notably lower conforming mortgage interest rates.

A bounce from current DJIA lows into the 8000 to 8400 price range followed by a plunge back through the 7300 level will, in my judgment, set up one final down-leg for the stock market that will likely carry the Dow into the mid- to low-6000's range. Should this event occur (most likely within the next 30-days) look for a large part of the dramatic amount of capital that will flee stocks to find its way into the conforming mortgage-backed securities market -- temporarily creating a environment supportive of steady to fractionally lower rates. There is no need to front-run this projection - if this event actually occurs -- the positive impact on your investors' rate sheets will be abundantly clear.