Friday, March 13, 2009

The mortgage market got off to a very strange start today. China's Premier Wen Jiabao said publicly that he's concerned about the safety of U.S. government debt. He went of to say he thinks China should aim to "fend off risk" by more broadly diversifying its $1.95 trillion investment portfolio. China holds almost a third of their foreign exchange reserves in U.S. Treasuries.

The "so what" factor attached to this event is significant. Now that the Chinese, one of the largest foreign buyers of U.S. debt instruments, are hinting that they may not be quite as aggressive buyers at future Treasury auctions -- the prospects for notably lower mortgage interest rates ahead has faded a bit more. The connection between the price of government debt instruments and the trend trajectory of mortgage interest rates is incontrovertible. You can "take-it-to-the-bank" that mortgage investors, already fretting about the gargantuan amount of government debt that has yet to make its way into the capital markets, will pace the floor a little more briskly as they consider the "what ifs" related to the potential diminished appetite of a major financier of American debt. Mortgage investors are keenly aware of the irrefutable connection between rising yields on Treasury obligations and the corresponding rise for mortgage interest rates.

Whether the Chinese Premier's comments were nothing more than a bit of off-the-cuff personal crumbling or truly a "heads up" with respect to a change in the Chinese government's attitudes toward U.S. Treasury debt has yet to be determined. Even so, it will likely serve to limit (at least near-term) the ability of mortgage interest rates to move notably lower from current levels.

Looking ahead to next week the Federal Open Market Committee will meet in a two-day session beginning on Tuesday and ending on Wednesday at 2:15 p.m. ET with the release of the committee's post-meeting statement. Market participants are virtually certain that the Fed will choose to leave short-term interest rates unchanged -- but observers will be interested to see what, if anything the Fed has to say regarding the possibility of the Federal Reserve Bank becoming a direct buyer of Treasury obligations. Next week's economic calendar includes the release of the Producer Price Index on Tuesday and the companion Consumer Price Index on Wednesday. Both measures of inflation pressure are expected to remain benign and should therefore exert little if any influence on the direction of mortgage interest rates.