Wednesday, August 12, 2009

Trading activity in the mortgage market is exceptionally thin as most investors have elected to take a "wait-and-see" approach with respect to the day's events.

The Treasury Department is conducting a $23 billion 10-year note auction. Yesterday's $37 billion 3-year note auction drew exceptionally solid bids from both domestic and foreign investors -- but that result is certainly no guarantee today's 10-year note offering will be as aggressively bid. Analysts cite persistent concerns that $2 trillion of government debt issuance this year will ultimately ignite inflation; a prospect that combined with signs of a budding economic recovery may require the government to "sweeten the pot" with higher yields on today's 10-year note offering in order to generate the required capital. If so, lousy auction results this afternoon at 1:00 p.m. ET will tend to nudge mortgage interest rates higher.

The Federal Open Market Committee will wrap up a two-day meeting this afternoon at 2:15 p.m. ET with the release of their post-meeting statement. The Fed is broadly expected to leave benchmark interest rates near zero. Policymakers will likely go out of their way to damp down growing anticipation that they are considering raising short-term interest rates in the near future to preemptively head off any inflation threat that might appear as the economy staggers to its feet from the worst recession since the Great Depression. It is highly unlikely the committee will substantially alter the outlook Fed Chairman Bernanke spelled out in July that calls for the economy to stabilize but grow sluggishly in the second half of the year, with persistently high unemployment well into 2010.

From a mortgage investor's perspective the most important part of today's Fed statement will be anything that indicates the central bank will soon end their direct purchase programs for government debt and mortgage-backed securities. There is a good chance policymakers will take this opportunity to lay the groundwork for concluding their direct purchases of $300 billion of various government debt instruments, $1.25 trillion of mortgage-backed securities and $200 billion or so of Fannie Mae and Freddie Mac agency debt. If this assessment proves accurate, the approaching retreat of a "big-checkbook" buyer from the credit markets may cause mortgage investors to shove rates fractionally higher. The Fed's post-meeting statement is expected to be released this afternoon at 2:15 p.m. ET -