Friday, December 11, 2009

It appears many mortgage investors are fretting far more strenuously over the disappointing auctions of 10-year and 30-year debt obligations than they are over a stronger-than-expected reading for November Retail Sales.

There are some analysts aggressively trying to fan worries that the last two Treasury auctions of the week drew less than stellar demand because -- U.S. government debt obligations - seen as the world's safest securities - are in danger of losing their coveted AAA rating. While such an event is certainly possible - it is not very probable and there is a major difference between those two conditions. It is much more likely that weaker-than-expected demand for Wednesday's $21 billion of 10-year notes and Thursday's $13 billion of 30-year bonds is more a function of year-end investor preference for either cash or very short-term government debt obligations. It is far more likely we are dealing with a seasonal condition with respect to demand for these longer-dated securities - rather than the effects of a major shift in investor sentiment.

Selling pressure in the mortgage market surged this morning driven by a report from the Commerce Department indicating November Retail Sales increased 1.3%, its largest advance since August, after rising 1.1% in October. It was the second straight monthly gain for overall retail sales and handily beat market expectations for a 0.7% gain. Compared to last year, overall retail sales were up 1.9%, the first year-on-year gain since August 2008. Excluding autos, retails sales increased 1.2% last month, the largest increase since January.

As the day progresses look for calmer, cooler heads to conclude that a significant amount of the surge in the pace of November sales was created through heavy discounting by retailers attempting to get a head-start on the holiday season. There is still a big question mark attached to the retail sales data regarding the sustainability of November's solid performance. Fundamentally, conditions remain poor for consumers. Wage income is more than 3.0% below its year-ago level and there is little chance of improvement in that figure until the labor sector once again begins to produce more jobs than it looses on a month-over-month basis. In a nutshell - in the judgment of many of the so called "experts", it is unlikely this report is as threatening to the prospects of steady to perhaps fractionally lower mortgage interest rates as many "talking-heads" are currently trying to make it out to be.

Stay Tuned...