Credit market participants are rearranging their portfolios just a bit this morning to make room to accommodate the Treasury Department's three-part, $99 billion note sale.



The Treasury will sell $35 billion of two-year notes on Tuesday, $35 billion of five-year notes on Wednesday and $29 billion of seven-year notes on Thursday. In recent weeks the yield on each of these three debt instruments has moved toward the top of their respective trading range - a condition that should help attract underinvested players.



The Fed has plans to buy a total of $29 billion of government debt obligations this week as part of their "QE2" stimulus program which should help to stabilize the bidding at the debt auctions as well. Well bid Treasury auctions will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates while poorly bid auctions are almost sure to push note interest rates higher.



The "wild card" event of the week will be President Obama's State of the Union address tomorrow evening. Credit market participants will be listening intently for clues as to whether the President appears willing to strike a deal with Republicans to cut spending in exchange for a national debt limit increase. The "so what" factor here is straightforward.




As of January 20th, the national debt stood at $14.004 trillion, just 290 billion below the congressionally mandated limit. The Treasury has estimated that based on recent spending and revenue trends, the government will run out of funding authority as early as March 31st. If the debt limit is not extended -- the government will not have the funding capacity to run its day-to-day operations -- which includes paying interest on money it already owes to its debt holders.




Without an extension of the debt ceiling -- not only will many government offices be shutdown - the U.S. would be very vulnerable to suffering a heavy round of punishment delivered by its debt holders in the form of sharply higher interest rates - a condition, should it develop, that will undoubtedly push mortgage interest rates higher. The good news is that there is little sign in the credit markets right now that investors are deeply concerned about this potential issue. Depending how the political rhetoric develops starting on Tuesday evening -- market participants' current halfhearted and/or dismissive attitude toward this matter will change in the blink-of-an-eye.




The manner and financial processes the President and Congress choose to employ as they address the national debt ceiling issue certainly packs enough potential "firepower" to make a big difference in rate sheets over the course of a very short period of time. Heads up.




The coming week's economic reports include December New Home Sales on Wednesday, initial weekly jobless claims and December Durable Goods Orders on Thursday and on Friday market participants will get a look at the first estimate of the pace of economic growth in the last-quarter of 2010 (as measured by Gross Domestic Product). These reports will add a little empirical evidence to support the broad opinion of most credit market participants that the economic recovery from the worst slump since the Great Depression gained a little momentum as the previous year drew to a close. This is a view that has already been well priced into the mortgage market - so further upward adjustments to mortgage interest rates as a direct result of this week's battery of economic reports will likely be small - if they occur at all.