Tuesday, December 7, 2010

Thin trading conditions are contributing heavily to this morning's sell off in the mortgage market.



The selling pressure is largely being created by the credit market's negative reaction to the announcement Congress has reached a compromise that will allow extending tax rates and jobless benefits until 2012. According to data compiled by Richard Rubin and Peter Cohn, writers for "Bloomberg.com" - extending all income tax rates for two years, along with renewal of business tax breaks, and renewal of the expanded unemployment insurance program could add about $750 billion to the federal deficit over the next decade. A rising federal debt burden at a time when the government's ability to service debt is deteriorating is not the "stuff" that lower mortgage interest rates are made of.



Credit markets are also under the shadow of more global events today.



The Irish parliament appears poised to pass a major austerity budget today and will likely pass a separate vote on social welfare measures on Thursday. If both measures are approved all conditions will have been met to enable Ireland to tap the $113 billion bailout package cobbled together by the European Central Bank and others. In the unlikely case one of these two measures fails to pass - the country would plunge into an even deeper fiscal crisis - an event that would compound growing contagion fears in the euro zone. A "no" vote" by the Irish parliament, should it come, will almost certainly cause capital to flee the uncertainties of euro zone for the relative safe haven of dollar denominated assets like Treasury obligation and mortgage-backed securities. Until the votes have been cast and tallied - I will continue to consider these two events to be mortgage market "wildcards".



Uncle Sam will be thrashing around in the credit market today looking to borrow $32 billion in the form of 3-year notes. This offering will likely draw decent demand - but not enough to create much of an overall improvement in investors' otherwise mortgage market unfriendly mindsets.



Looking ahead to the balance of the week the economic calendar is exceptionally light -- with little more than Thursday's initial weekly jobless claims number and October Wholesale Inventory data available for mortgage investors to chew on.