Monday, October 5, 2009

Uncle Sam has plans to borrow $78 billion this week. He will start things off with $7 billion of 10-year inflation-indexed securities today followed by $39 billion of 3-year notes tomorrow, $20 billion of 10-year notes on Wednesday and he will wrap things up on Thursday with a $12 billion offering of 30-year bonds. Demand has been solid at previous government debt auctions. Keep your fingers crossed that this week's supply is easily absorbed. If investors get a case of indigestion trying to swallow this mammoth amount of supply -- the upward pressure on mortgage interest rates will increase substantially.


The incoming macro-economic news is sparse this week. Investors took just a moment this morning to grant the September Institute of Supply Management service sector report a passing glance. This measure of activity in the largest sector of the economy rose to 50.9% in September - a nice improvement from 48.4 in August and noticeably above the consensus forecast for a reading of 50.0. The service sector represents about 80% of domestic economic activity, including businesses such as banks, mortgage companies, airlines, hotels and restaurants. The prices paid component of the index fell to 48.8 in September from 63.1 in August - highlighting the fact current inflation pressures are essentially nonexistent. The employment component of the index rose to its highest level since August 2008 - registering a reading of 44.3 from 43.5 in August. Melted down to its bare essence -- the September Institute of Supply Management service sector report is consistent with market participants' current glass-half-full view of the economy. No big whoop.


The "adjustable" feature of today's 10-year inflation-indexed notes the government will be peddling should make them very attractive to domestic and foreign investors alike. If this assessment proves accurate, today's auction will not exert much, if any influence on the current trend trajectory of mortgage interest rates.