Friday, September 18, 2009

There is nothing on the economic calendar for investors to chew on this morning - so trading action in the mortgage market will likely be influenced most by activity in the stock markets and investors' preparations for next week's $112 billion three-part Treasury auctions.


Further improvement in stock prices will tend to serve as a drag on any attempt by mortgage interest rates to move notably lower from current levels. If a much overdo downward correction in the stock markets were to develop -- such an event would very likely support steady to fractionally lower mortgage interest rates as capital flees the riskier assets classes for the relative safe haven of government debt and mortgage-backed securities.


Speaking of government debt - Uncle Sam will be thrashing around in the credit markets looking to borrow $112 billion in the form of 2-, 5- and 7-year notes next week. The bidding activity will begin on Tuesday when $43 billion of 2-year notes go on the block, followed by Wednesday's $40 billion of 5-year notes and concluding with Thursday's $29 billion 7-year note offering. The $112 billion size of the coming week's auction schedule is just below a weekly record set in July, but the auction size for each of the individual maturities are actually at all-time highs.


If recent auctions are any guide, the prospects for next week's batch of sales are pretty good. Last week's streak of 3- and 10-year notes together with a 30-year bond component were surprisingly well bid, a major factor supporting mortgage interest rates a current levels. Most analysts seem to believe the coming weeks $112 billion deluge of government debt will be absorbed with little problem. The carry trade dynamics (a way investors make money by borrowing at short-term low rates and investing in securities that yield more) are still very strong and should play a large part in insuring there will be plenty of aggressive buyers at next week's auction. If that assessment proves accurate, the upcoming Treasury event will likely exert little, if any discernible influence on the level of mortgage interest rates.


Other events that will draw mortgage investors' attention during the coming week include a two-day Fed meeting on Tuesday and Wednesday together with the August Existing and New Home Sales figures on Thursday and Friday.