Commentary: The Treasury Department is set to auction a $35 billion stack of two-year notes today. It will be the first of a series of three auctions scheduled for the week. Today's event will conclude at 1:00 p.m. ET and I'll post the auction results on my website as soon as possible once the final gavel falls.
The two-year note has drawn generally solid demand at auctions over the past two years, and most observers expect today's event will also be well bid. If so, look for mortgage interest rates to remain essentially unchanged for the day. In the unlikely event this offering requires Uncle Sam to "sweeten-the-pot" by pushing the yield on the 2-year note higher - expect mortgage interest rates to move higher as well.
Earlier this morning the Conference Board (a private, non-profit organization that compiles and produces leading economic indicators for its clients) said consumer confidence rose more than expected in January to its highest level in eight months. The Conference Board said its index of consumer attitudes jumped to 60.6% in January from an upwardly revised 53.3% in December. Consumers rated business and labor market conditions more favorably and expressed greater confidence that the economy will continue to expand and generate more jobs in the months ahead. Mortgage investors are typically far more interested in what consumers are actually doing - rather than how they say they are feeling. Even so, the outsized spike in January consumer confidence created a bit of a headwind as mortgage interest rates took a stab at moving fractionally lower in today's early going.
In my opinion, the "wild card" event of the week will be President Obama's State of the Union address -- scheduled for 9:00 p.m. ET this 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 surrounding this issue develops -- market participants' current halfhearted and/or dismissive attitude toward this matter could change in the blink-of-an-eye. Heads up.
The balance of the 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.
THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
