Wednesday, February 11, 2009

Mortgage investors are milling around nervously this morning as they await the results of the Treasury Department's record-breaking auction of $21 billion worth of 10-year notes.
This auction is viewed by many as a major litmus test of global investor's appetite for longer-dated government debt. With Uncle Sam's debt burdened (currently estimated at $1.5 to $2.5 trillion in fiscal 2009) expected to escalate as Congress hammers out an economic stimulus package and the Treasury Department and the Federal Reserve tally the cost to rescue the crumbling banking system, solid buying appetite from investors, especially overseas investors is critical if mortgage interest rates are going to remain steady to fractionally lower.

Mortgage investors fret that foreign investors will pare their purchases of longer-dated Treasuries as concerns grow that the Untied States will find it difficult, if not impossible to repay the massive debt burden it has piled up to finance the programs intended to end its year-old recession. If Uncle Sam is forced to raise the yield on his debt obligations to attract the required capital because of these creditor concerns -- you can "take-it-to-the-bank" that mortgage interest rates will likely rise as well.

I have heard some analysts suggest were the yield (interest rate) on 10-year notes to rise - Fed Chairman Bernanke and his band of merry central bankers would ride to the rescue as a direct buyer of Treasury obligations. That idea sounds great on its face - but the money the Fed would require for this purpose would be created by turning on the printing presses. While this strategy would certainly provide the near-term funds the Fed would need to become a major player in the Treasury markets -- it would immediately reduce the value on every dollar you have in your pocket - directly creating significant inflationary pressures for us all down the road.

I think it is telling that Fed Chairman Bernanke said little about buying Treasuries in his testimony to Congress yesterday. My bet is he hopes he and his fellow central bankers will be able to avoid being called upon to employ this "last-ditch" option to hold rates down. Keep your fingers crossed the Fed finds it possible to keep their hands in their pockets at upcoming Treasury auctions.