Wednesday, March 25, 2009

Investors are starting to get a little skittish about absorbing large quantities of government debt as they are asked to take on substantial inflation risk in return for very little reward. While Uncle Sam has had no trouble placing short-term debt with maturities up to 2-years - he has begun to find that longer-dated securities are increasingly harder to sell. The "so what" factor from a mortgage market perspective is significant.

The ratio of bids placed to securities sold (the so called "bid-to-cover" ratio) was very low in February and through the auctions of 3- and 10-year notes earlier this month. Many observers believe these low bid-to-cover ratio's confirm investors were looking for more yield than the government was willing to pay. These analysts believe the Federal Reserve was left with little choice but to announce last week it would start buying longer-dated Treasury securities in an effort to temporarily fill the aggressive buyer void. It is highly likely that without the presence of the Fed in the credit markets the yield on today's $34 billion Treasury debt offering of 5-year notes and tomorrow's $20 billion of 7-year notes would have ratcheted higher - likely dragging mortgage interest rates higher in the process. That's the good news.

The bad news is that the Fed's $300 billion war-chest for the direct purchase of Treasury obligations is "chump-change" compared to the government's overall borrowing need this fiscal year (ending in September) of $2+ trillion dollars. The Fed's $300 billion is a far more symbolic - rather than pragmatic sum. The Fed and more experienced market participants clearly know that all the Fed will be able to do with their direct-purchase funds is to forestall the otherwise inevitable rise in long-term borrowing costs (mortgage money included) across the economy.

The Treasury will conclude their auction of 5-year notes at 1:00 p.m. ET. Everybody will be interested to see whether the buying from the Fed today will be able to offset the size of the incoming supply.

Today's February Durable Goods Orders figure and the New Home Sales number briefly drew a little attention from mortgage investors. New orders for items manufactured to last three-year or more rose for the first-time in seven months in February. The Commerce Department said durable goods orders were up 3.4% last month, its biggest increase since December 2007. The February gain was in sharp contrast to the revised 7.3% plunge in orders in January. One month does not make a trend - but the improvement in durable goods orders offers a slight flicker of hope that the worst of the recession in the manufacturing sector may have passed.

In a separate report the Commerce Department announced that sales of newly built single-family homes unexpectedly rose at the fastest pace in 10-months during February. Sales rose 4.7% last month while the inventory of homes available for sale fell to the lowest level since June 2002. Even so, at the current sales pace there is still a 12.2 months supply of available homes on the market. Most analysts firmly believe that a bottom in the new home market will not be reached until the available homes for sales drops to a 10.5 month supply level.