Thursday, July 30, 2009

Traders are in a gloomy mood as they await the results of today's $28 billion 7-year note auction.

Poor reception to yesterday's 5-year note offering followed meager bidding, especially by foreign investors, at Tuesday's $42 billion two-year debt sale. Demand for yesterday's 5-year note offering was the lowest in almost a year. An increasing number of market participants are coming to believe the stellar results from Uncle Sam's debt auctions just a few weeks ago were a fluke. Let's hope that assessment proves to be a bit overwrought.

The "so what" factor here is simple and straightforward - a poorly bid 7-year Treasury note auction today will likely serve to push mortgage interest rates higher. Overseas buying of Treasuries, by central banks in particular, is seen as a critical supportive element for the prospects of steady to perhaps fractionally lower mortgage interest rates. Without the strong participation of foreign investors interest rates (including mortgage rates) could rise throughout the economy at a faster pace than might be appropriate given the lingering effects of the worst recession in decades.

The Labor Department reported this morning that the number of workers filing first-time jobless benefit claims during the week ended July 25^th rose by 25,000. This data has been distorted during the last several reporting periods by the impact of major layoffs in the auto and related industries. A Labor Department spokesperson indicated the majority of the earlier data-warp has "worked itself out." The four-week moving average for new claims, considered to be a better gauge of underlying trends as it smoothes out week-to-week volatility, fell by 8,250. This was the lowest level for this economic metric since January -- and it marked the fifth straight week the average has declined. Mortgage investors barely noticed the suggestion embedded in this data that the pace of firings in the nation's work force is flattening out considerably. The labor sector data will draw more attention within the next two weeks - but for today the result of the 7-year Treasury note auction trump all else.