The government is scheduled to sell a combined $66 billion worth of Treasury debt obligations this week: $32 billion of 3-year notes tomorrow; $21 billion of 10-year debt on Wednesday and $13 billion of 30-year bonds on Thursday. The auctions will conclude at 1:00 p.m. ET.


Because of its relatively short duration the 3-year note offering will likely draw sufficient demand from domestic and global investors that this event will not be much of a factor in terms of influencing the direction of mortgage interest rates. The 10-year and 30-year bond offerings represent a bigger concern.



According to data complied by Daniel Kruger, a correspondent for Bloomberg.com, Wall Street banks are cutting their holdings of Treasuries at the fastest pace since 2004. These firms are redeploying this capital in anticipation the economy will strengthen and demand for higher-yielding assets like stocks and corporate debt instruments will increase. The 18 primary dealers that trade with the Federal Reserve reported that their collective holdings of government debt tumbled to a net $2.34 billion on December 29th -- from $81.3 billion on November 24th. That is a heck of a job of house cleaning in anybody's book - and it does not particularly bode well for the likelihood these major broker/dealers will show up with big buying appetites at this week's government debt auctions.




Keep your fingers crossed that ongoing sovereign debt turmoil in the euro zone together with the fact that the upcoming supply of 10- and 30-year Treasuries are on track to be sold at their highest level in seven months will be enough incentive to induce foreign investors to show up aggressively on Wednesday and Thursday. If one or both of these auctions are poorly bid -- it is almost a certainty that mortgage investors will push note rates higher. Heads up.