Wednesday, October 7, 2009

The Treasury Department is gearing up this morning to conduct its third auction of the week. The government will be taking bids on $20 billion of 10-year notes. The final gavel is slated to fall at 1:00 p.m. ET.


A well bid 10-year note auction followed by solid demand for tomorrow's 30-year bond offering will be viewed by many as a solid indication that fixed-income investors see no looming threat of inflation anywhere on the horizon - which by extension - suggests these investors believe economic growth will once again begin to wane in 2010. The good news here is that mortgage interest rates will almost certainly continue to hover within a whisper of historic lows while the bad news is that the demand for mortgage financing will likely continue to contract as joblessness rises and the consumer develops a "bunker mentality" with respect to spending of any sort.


On the other hand, if the Treasury's 10-year note and 30-year bond offering result in higher yields for both of these instruments, fixed-income investors will be putting their-money-where-their-mouth-is with respect to their belief the sustained economic growth will prevail -- which will in-turn lead to an increase in employment opportunities followed by a notable increase in mortgage demand. Granted, if this scenario develops it will set the stage for a slow but progressive move to higher mortgage interest rates. If such an event were to occur - it may actually prove to be a "good thing" in terms of origination volumes.


As mentioned before in this space before, there are an increasing number of reasons to think we've reached a point in the economic cycle where a modest uptick in mortgage interest rates created by accelerating economic growth will actually lead to the development of a far better market place for mortgage originators than a economic backdrop that supports yet lower mortgage interest rates could ever come close to generating.


It is Wednesday - which means the Mortgage Bankers of America have released their index of mortgage applications for the most recent week -- ended October 2nd. The aggregate index, which includes both purchase and refinance loans, rose 16.4% to its highest level since the week ended May 22nd. Requests for purchase money mortgages were up 13.2% while requests for refinance funding were up 18.2%. The refinance share of applications on a national basis rose to 66.3% from 65.3% the previous week, but remained well below the peak of 85.3% during the week ended January 9th. The MBA went on to report 30-year fixed-rate mortgages, excluding fees, averaged 4.89%, down 0.05 percentage points from the previous week and the lowest since the week ended May 22nd. Last week's 30-year conforming fixed-rate was above the all-time low of 4.61% set back during the week of March 27th - but well below the year-ago mark of 5.99%.