Tuesday, May 6, 2009

Uncle Sam is splashing around in the credit market this morning looking to borrow $22 billion in the form of 10-year notes. He'll wrap-up things up at 1:00 p.m. ET.

As expected, yesterday's three-year note auction went off without a hitch and generated solid investor demand. Keep you fingers crossed that today's outsized 10-year note auction goes as well. The Treasury's 10-year notes are currently carrying a yield better than 3.0% -- which should make them enticing to domestic and foreign investors alike. A well bid 10-year note auction will tend to support steady to perhaps fractionally lower interest rates while weak auction results will likely put some upward pressure on mortgage rates. Today's 10-year note offering will likely produce unremarkable bid results. If so, this event will exert little, if any meaningful influence on the direction of mortgage interest rates today.

There was nothing in the way of important economic news from the government on today's calendar - so the private ADP payroll survey and the Challenger, Gray and Christmas survey of layoff announcements garnered a little more attention from mortgage investors than normal. The ADP National Employment Report showed a 491,000 drop in private payrolls in March, a far less severe decline than the 650,000 job loss in the private sector most analysts had been expecting to see. The Challenger report showed planned job cuts totaled 132,590 in April, significantly less that the 150,411 March number. Both of these private reports are known to vary significantly from the labor sector numbers the government reports. Even so, the marked improvement in the private April data has some mortgage investors nervous that the nonfarm payroll report from the Labor Department on Friday may not be nearly as bleak as most analysts currently expect.

Most market participants, economists and analysts in general are expecting the government's April Nonfarm Payroll report will show the nation lost 620,000 jobs (from both the private and government sectors) last month - a condition that has caused the unemployment rate to surge to 8.9% from the March level of 8.4%. Actual numbers that closely approximate this consensus estimate are already priced into the mortgage market and will therefore create little if any impact on the current level of mortgage interest rates.

With respect to the mortgage market, the risk on Friday is that the headline payroll number posts a job loss of 600,000 or less and/or the national jobless rate post a reading of 8.7% or less. Actual numbers that fall meaningfully below current expectations will probably unsettle a rather large number of mortgage investors. As you well know, spooked investors tend to sell first -- and ask questions later. If this scenario were to develop, even aggressive buying by the Fed will not likely be enough to keep mortgage interest rates from moving uncomfortably higher from current levels.