Mortgage investors have absolutely no incentive to step in front of the government supply train coming down the tracks this week.
Uncle Sam will be in the credit markets every day through Thursday looking to borrow a record setting $115 billion. The first car load of supply arrives today in the form of $6 billion of 20-year inflation-indexed securities, followed by Tuesday's $42 billion of 2-year notes, $39 billion of 5-year notes on Wednesday and $28 billion of 7-year notes on Thursday.
Most investors will likely choose to stand well back from the tracks for fear that the massive weight of government debt supply combined with signs of economic recovery followed by an attendant improvement in stock prices could cause a major derailment in the credit markets violent enough to push mortgage interest rates notably higher.
It is worth noting that overseas investors, including foreign central banks, have been strong participants at this year's Treasury auctions - and there is little reason to believe their participation levels will be notably worse this time around. Even so, look for mortgage investors to be very cautious with their pricing strategies until there is clear evidence demand for Uncle Sam's debt offerings has not waned.
This morning's stronger-than-expected June New Home Sales numbers certainly did nothing to brighten the mood in the mortgage market. According to Commerce Department figures new home sales climbed 11.0% on a month-over-month basis in June. The inventory level of new homes on the market has now fallen to its lowest levels since February 1998. While the data continues to point to a housing sector attempting to put in a bottom -- few analysts are willing to declare the end of the worst decline in new home sales in decades. The "all clear" signal will only be given once sale prices begin to trend higher - and that was clearly not the case in June -- as the median new home sales price fell 5.8% from the month earlier mark.
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