Thursday, May 7, 2009

Mortgage investors will no doubt approach the next two days as carefully. There is nothing like a major Treasury auction, the release of a much anticipated government mandated bank stress test, and an upcoming major macro-economic report to make mortgage investors antsy.

Uncle Sam is in the credit markets once again this morning looking to borrow $14 billion in the form of 30-year bonds. This will be the last leg of the Treasury Department's three-part quarterly refunding. A number of analysts are concerned that the current yield of 4.17% is not high enough to attract significant buying interest from auction participants. If these concerns are proven to be well founded -- the bid price for this offering will fall - pushing the yield on the 30-year bond higher. That's a scenario that will almost certainly result in higher mortgage interest rates. While the yield on the 30-year bond may indeed be pushed higher -- as investors chose to remain guarded in front of this afternoon's release of the government's bank stress test results and tomorrow's big April nonfarm payroll data - the 30-year bond yield won't climb by much and the overall impact on the current level of mortgage interest rates related to these events will be minimal.

The results of the government's "stress test" for 19 of the top banks in the country will officially be made public at 5:00 p.m. ET today. Treasury Secretary Geithner has reassured investors that none of the 19 banks under examination are at risk of insolvency. Some banks in the group may need injections of additional capital to meet the new government standards. Should the total amount of capital required to bring these banks "up-to-snuff" fall below $300 billion - most analysts believe investors will breathe a big sigh of relief -- and the rally in the stock markets will continue unabated. I'm not so sure - but should this scenario "pan-out" like most predict it will - this event will tend to put some modest additional upward pressure on mortgage interest rates.

The unexpected drop in the number of people filing first-time claims for unemployment benefits during the past week was a bit unsettling for mortgage investors. The Labor Department reported weekly jobless claims for the period ended May 2nd fell by 34,000 - equaling a mark last experienced in January. The four-week moving average of jobless claims, a better gauge of underlying labor trends because it irons out week-to-week volatility, fell for the fourth week in a row. The survey period for this week's jobless claims data falls outside of the survey period for tomorrow's much more important April nonfarm payroll report. Nonetheless, a number of mortgage investors are marking their headline forecast for nonfarm payrolls down to a loss of 600,000 to 590,000 jobs from their earlier estimates for April job losses of 620,000 or more. Only a handful of analysts have elected to mark down their expectations for a national jobless rate of 8.9% to be reported tomorrow.