Just because yesterday's 3-year note auction was a bust - it does not mean today's $21 billion sale of 10-year notes will be poorly bid as well. Right now the yield of the 10-year note is hovering above 2.45% -- the center-point of its multi-day trading range. The probabilities are high investors will view the current yield especially attractive as speculation heats up regarding another round of aggressive buying by the Fed before the year is out.
If, as most market participants expect, the Fed does launch their so called "QE2" financial stimulus program at the conclusion of their next scheduled meeting on November 3rd - the "sweet spot" for the Fed's buying appetite will probably be found among Treasury debt obligations with maturities between five to 10 years - a expectation that will not likely be lost on the bidders at today's auction. Uncle Sam's 10-year note auction will conclude at 1:00 p.m. ET.
As a side bar to the "QE2" discussion - it is worth noting that the Fed is not expected to revisit their direct mortgage-backed security purchase program this year - but if the economy does not pick-up by mid-2011 - it would not be particularly surprising to the see the Fed start writing checks for the direct purchase of mortgage-backed securities as an additional part of the "QE2" stimulus initiative.
Earlier today the Mortgage Bankers of America released their mortgage application survey data for the week ended October 8th. According to the MBA, mortgage applications for home refinancing rose for the first time in six weeks, with demand jumping to its highest level since August as eligible homeowners scrambled to avail themselves of record low interest rates. Refinance requests continue to represent four out of every five loans in the national mortgage pipeline. The tighter FHA mortgage requirements which took effect on October 4th no doubt took a toll on purchase activity. Until/unless these super-tight credit and appraisal standards are relaxed a little -- it will be difficult for the industry to see much improvement in the loan production mix.
The MBA's seasonally adjusted index of all mortgage applications, a composite of both purchase and refinance loan requests, increased 14.6% last week, with total volume surging to its highest mark since May 2009. Refinance applications were up 21% while purchase activity slumped by 8.5%. 30-year fixed-rate mortgages, excluding fees, averaged 4.21% -- their lowest level since the MBA began keeping records in 1990.
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