Friday, November 20, 2009

Trading activity is very light in the mortgage market this morning. There is absolutely nothing in the way of economic data, debt supply or Federal Reserve speakers that will create a stir among mortgage investors today.

The few mortgage-backed security trades that have been completed so far in this session are likely taking their directional cues from the trajectory of stock prices. Falling stock prices tend to support steady to fractionally lower mortgage interest rates while rising stock prices tend to drag rates higher.

Yesterday the S&P posted its worst one-day percentage fall in three weeks. The resulting reallocation of capital from these riskier assets classes into "safe haven" investment vehicles like government debt obligations and mortgage-backed securities helped hold interest rates relatively steady just as rates appeared to be on the verge of drifting higher.


Looking ahead - the coming holiday shortened week will be a busy one. Monday's October Existing Home Sales figures together with Wednesday's New Home Sales number and the inflation component contained in the October Personal Income and Spending report will draw more than a passing glance from mortgage investors. Both housing reports are expected to show solid month-over-month improvements in the pace of sales -- driven in large part by the influence of the first-time home buyer tax-credit program. Most analysts see a very benign reading for inflation at the consumer level baked-into-the-cake for the personal consumption index component of the broader income and spending figures from last month. If these projections are "on-the-money" - there is nothing on next week's economic calendar that will likely serve to induce mortgage investors to push rates notably higher.


The government's borrowing needs are certainly not influenced in the least by major national holidays. The Treasury Department will be conducting a $44 billion 2-year note auction on Monday, a $42 billion 5-year note auction on Tuesday followed by a $32 billion 7-year note offering on Wednesday. That's a huge amount of supply to run into the credit market in a shortened week. Most analysts believe that these offerings will find solid demand, particularly by foreign investors. If that assessment proves accurate, the impact of these auctions on the trend trajectory of mortgage interest rates should be minimal.