Tuesday, May 26, 2009

Trading action in the mortgage market will likely be dominated by the massive Treasury auctions scheduled for today, Wednesday and Thursday. Uncle Sam will be looking to borrow $40 billion in the form of 2-year notes today, $35 billion tomorrow and $26 billion of 7-year notes on Thursday.

There are those that argue that the yields on these securities are high enough (last touched during November 2008) that demand will be strong - and further yield increases won't be necessary to attract the required capital. If so, this week's record-tying Treasury auction will likely have little, if any noticeable impact on the current level of mortgage interest rates.

There are other analysts that strongly believe yields will move higher as global investors begin to fret that the sovereign creditworthiness of the United States will be severely threatened as the government makes an attempt to resolve the credit crisis by taking on mountains of additional debt. It will be months yet before the results of the government's massive borrowing and spending strategy to revive the economy will be clearly known.

Many observers believe global investors will choose to take a "worst-case" approach and demand higher yields for their money now as they anticipate the government's effort to borrow the nation into prosperity will prove a dismal failure. If this perspective proves to be broadly represented in the global investment community -- look for rising yield requirements at this week's Treasury auction to drag mortgage interest rates higher as well.

Most feel the yield on the government's 2-year note is unlikely to fall much - but the 5- and 7-year notes are at levels that will likely draw significant and aggressive bidding from both domestic and foreign investors. If those feelings prove accurate, mortgage interest rates stand a good possibility of finishing the week fractionally lower than where they began.