Wednesday, April 29, 2009

Uncle Sam will be looking to borrow $26 billion in the form of 7-year notes today. The Treasury auction will conclude at 1:00 p.m. ET. Not looking for anything dramatic - but we may see a temporary little "relief rally" in the mortgage market following the conclusion of this week's record setting borrowing spree by Uncle Sam.

There is some speculation in the mortgage market this morning that the Federal Open Market Committee might announce an expansion of its Treasury purchase program at the conclusion of their monetary policy meeting this afternoon at 2:15 p.m. ET. Such news would almost certainly nudge mortgage interest rates fractionally lower - but unfortunately such an outcome is probably little more than an exercise in wishful thinking.

Some mortgage investors may actually choose to nudge rates a touch higher if, as expected, for the first-time in more than a year the Fed indicates it sees some developing signs the worst of the recession may be over. The Fed may also choose to highlight the fact that they are still actively engaged in the purchase of more than $1 trillion in asset-backed securities, $300 billion in longer-term Treasury obligations and more than $1.2 trillion of mortgage-backed securities. As long as the Fed has this kind of financial firepower in their back pocket - interest rates might rise a bit - but they are certainly not going to jump sharply higher any time soon.

Mortgage investors' anxiety may be soothed further if the committee reinforces its assessment that inflation "will remain subdued in coming quarters" because of slack economic activity and a puny labor sector. All-in-all today's Fed meeting will likely go into the books as a non-event with respect to its impact on mortgage interest rates.

The Commerce Department announced earlier this morning that its preliminary estimate of first-quarter Gross Domestic Product showed economic activity shrank by 6.1%. That performance on its face was considerably weaker than most economists had anticipated. However, when analysts had a chance to drill down into the data more deeply - the number was not nearly as ugly as it first appeared. Most of the notably drop in the headline figure was attributable to the largest inventory drawdown since 1947. Believe it or not - analysts actually see the massive first-quarter inventory drawdown as a positive development for future economic growth. What initially looked like a bit of mortgage friendly data has actually morphed into a minor hindrance to the prospects of lower rates.

In a separate report the Mortgage Bankers of America announced home loan applications fell by 18.2% during the week ended April 24th - dragged lower by a big 21.9% drop in refinance applications and a far more modest 0.6% slide in applications for home purchases. During the period the average 30-year mortgage dropped 0.11% to 4.62% -- nearly matching the all-time low of 4.61% set during the week ended March 27.