Wednesday,May 27, 2009

The mood in the credit markets is ugly this morning as the Treasury Department lines up to dump $35 billion of 5-year notes on investors already staggering under the weight of the government's massive borrowing spree.
The Fed is active in the market as a buyer again today - with authorization to spend up to $300 billion to support steady to fractionally lower rates for consumers and businesses. The objective is noble - but the financial firepower is weak. Compared to the $2.5 trillion dollars of supply from Uncle Sam scheduled to wash through the credit market before the end of the government's fiscal year in September - the Fed appears to be engaged in an almost meaningless effort to drain the ocean with a teaspoon.

Credit market investors are in a particularly bad humor this morning as General Motors bondholders have rejected the latest restructuring offer from the company's management. The likelihood that the government will soon be called upon to inject "massive" amounts of capital into the automaker simply compounds credit market concerns about the size of future government borrowing. The "so what" factor here from a mortgage perspective is straightforward - increased debt obligations flushing into the credit market from the government will push Treasury prices lower - and in our world when prices fall - interest rates rise.

This morning's release of the April Existing Home Sales figure was almost completely overshadowed by investor nervousness surrounding today's 5-year Treasury note auction and growing anxiety about tomorrow's bigger hurdle of $26 billion in the form of 7-year notes The National Association of Realtors said purchases increased 2.9% on an annualized basis last month. Distressed sales accounted for 45% of all transactions. The inventory of homes for sale increased 8.7% as more homes were listed during the popular spring selling season.

In a related, but separate report the Mortgage Bankers of America said their seasonally adjusted index of loan applications to purchase or refinance a home fell by 14% during the week ended May 22nd. The refinance component of the index fell by 14% while the purchase component gained 1.0%.