Monday, June 22, 2009

The prospect for notably lower mortgage interest rates has hit a wall-of-worry created by investors' jitters over this week's record amount of supply Uncle Sam plans to dump into the credit markets. The Treasury Department intends to sell $40 billion of 2-year notes on Tuesday, $37 billion of 5-year notes on Wednesday and $27 billion of 7-year notes on Thursday (for a total of $104 billion).

Investors will comb carefully through Wednesday afternoon's post-meeting statement from the Federal Open Market Committee. Market participants will consider carefully the Fed's guidance on growth and they will hunt diligently for any hint the central bank intends to expand its $300 billion program for the direct purchase of Treasury debt obligations.

Fed Chairman Bernanke and his fellow committee members will be walking a tight-rope as they craft the written statement of their view of the economy and their analysis of the appropriate blend of monetary and credit policy. The majority of economists see zero chance the Fed will raise its benchmark short-term fed fund rate as Mr. Bernanke and company simultaneously attempt to nurture hopes the end of the recession is near. The chances are high that the Fed's post-meeting statement will come off as a mixed message - especially to fixed-income investor investment community. These market participants are hyper-sensitive to the idea that improving economic activity leads to increased demand for capital - which in-turn leads to higher interest rates. In my experience, when investors are unsettled about a message from the Fed, they tend to take a "safe-rather-than-sorry" approach to their mortgage pipeline risk management strategies. In this case -- if history repeats itself -- look for mortgage interest rates to struggle to make any headway toward notably lower levels this week.

Worth repeating (From Friday's commentary - with update): The stock market's performance will almost certainly exert some influence on the direction of mortgage interest rates over the next five business days. Last week when stock prices retreated - mortgage interest rates crept incrementally lower - and when stock prices showed some strength -- mortgage rates edged higher. There is little reason to expect this relationship will be any different this week. As I pointed out in Friday's commentary from a technical perspective the Dow will likely find it very difficult to move above the 8800 mark (last week's intraday high was 8798) and the NASDAQ will find it challenging if not impossible to push through the 1865 or so mark (last week's intraday high was 1838). I see reason to believe the stock markets will begin to loose upward momentum during the Tuesday - Thursday time frame this week. If my assessment proves accurate weakness in the equity market will serve to mute some, but not necessarily all of the upward pressure this week's Treasury auctions will exert on the trend trajectory of mortgage interest rates.