Thursday, February 12, 2009

As you are probably aware, Congress is expected to pass, as early as tomorrow, a $789 billion stimulus package intended to revive the struggling economy. The stimulus package is split 36% for tax cuts and 64% in spending and other provisions. "Combine this new spending and borrowing it will require with the trillion of dollars still needed for the banking system, and we are about to test the outer limits of our national balance sheet," the Wall Street Journal said in an editorial this morning.

In apparent concert with the assessment of the Wall Street Journal editorial staff, credit market participants are simply treading water as they await the results of the Treasury's auction of $14 billion of 30-year bonds this afternoon.

This event will wrap-up a week of record-setting borrowing by Uncle Sam. Many market participants are hoping that yesterday's relatively firm demand for a $21 billion offering of 10-year notes from the government suggests today's 30-year bond sale will receive equally solid buying interest from the global investment community. Unfortunately there is little evidence to indicate a sharp correlation between 10-year note auction results and that of the 30-year bond.

The surprising 1.0% improvement in the January retail sales figure -- together with the likelihood that Congress will approve a major spending initiative before the week is over - provide reason enough to believe global investors will be hesitant to "bid-up" the price at the government's 30-year bond sale. If this assessment proves accurate, it will be difficult, if not impossible for mortgage interest rates to move notably lower today.