Thursday, June 4, 2009

Market participants are nervously awaiting the announcement from the Treasury Department regarding the size of next week's 3-part auction. Uncle Sam will be looking to borrow an expected $54 billion in the form of 3- and 10-year notes together with 30-year bonds. In the last 45 days global markets have been very hesitant to put their money into Treasury investments with maturities beyond 5-years. Mortgage investors fret that the government will be forced to push the yield on next week's 10-year note and 30-year bond offerings considerably higher in order to attract the required capital. If those fears are actualized, rising yields in the government debt markets will drag mortgage interest rates higher as well - and in light of those concerns - mortgage investors are taking a "better-safe-than-sorry" tact and pushing rates preemptively higher today.


I think it is worth noting that a lot of really positive news on the stabilization and imminent recovery of the global economy has been priced into the stock markets. The "worst case" scenario involving an economic nuclear winter for the industrialized nations may have been avoided, but the jury is still out on a self-sustaining return to long-term growth trends here and aboard. From this point forward the rising pace of government borrowing by Uncle Sam and other countries in the global marketplace will likely do little to aid recovery as the burden of the associated rise in consumer and business borrowing costs stymies the very growth governments were intending to generate. It is highly likely the current attempt by governments to borrow their respective economies into prosperity will fall far short of the intended results.


"What does this have to do with the current level of mortgage interest rates?" you might ask.

Potentially everything.

Rising borrowing costs increase operating expenses for business and households alike. Consumers with less money to spend buy fewer goods and services. Gross income for businesses falls as consumers' buying power erodes - causing corporate net incomes to plummet and stock prices to dive. Stock markets around the world are extremely vulnerable to a downward correction before the end of the month. If this assessment proves accurate, the resulting flight-to-quality rush of capital back into safe-haven investments like Treasury obligations and mortgage-backed securities will be strong enough to frame a ceiling over mortgage interest rates at roughly current levels. I'm not sure how much mortgage interest rates might improve -- but I do know unequivocally before any improvement in the level of mortgage interest rates can possibly begin - they have to first stop moving higher.