Daily Commentary by Larry Baer 7.29.2011

Commentary: Shocking.

The government released data earlier this morning that showed the economy grew at a revised 1.3% pace during the second-quarter. Economists had been anticipating a decent 1.9% performance for the period. Even more disturbing, the Commerce Department slashed their previous first-quarter 2011 estimate of overall economic growth from a gain of a 1.9% -- to a meager 0.4% -- a sign the economy came within a whisker of flat-lining during the first three-months of the year. To finish off this morning's dismal data "dog-pile" officials at the Commerce Department revised down their earlier quesstimate of fourth-quarter 2010 economic growth to 2.3% from 3.1%. The stunning news on the health of the economy sent investors fleeing from riskier asset classes like stocks into the relative safe-haven of Treasury debt obligations and mortgage-backed securities.

The feeble condition of the economy may cause a major shift in the current political impasse surrounding the expansion of the nation's debt ceiling. To sharply reduce government spending at a time when the economy is in such a perilously weak condition could prove to be the "final straw" that sends the nation back into the depths of a recession. I'm certainly not suggesting I know the answer - but I can certainly see a large number of stock market participants are headed for the exits - an action indicating a collective concern that a sharp and sustained economic downturn is imminent.

Looking ahead to the coming week the pending expansion of the debt ceiling and all of the political wrangling surrounding calls for major spending cuts and tax increases will trump all economic data with the exception of Friday's nonfarm payroll figures. The consensus estimate is calling for an increase of 90,000 new jobs in July and a national jobless rate of 9.2%. As long as the actual numbers closely approximate the consensus estimate this data series will likely prove to be supportive of steady to perhaps fractionally lower mortgage rates. In the off-chance headline payroll growth in July exceeds 100,000 or more -- and/or the national jobless rate slips to 9.1% or lower -- look for investors to nudge mortgage interest rates fractionally higher.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

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Weekly Update by Bill Fisher 7.25.2011

As this is written, members of both political parties are busy thinking up different debt reduction formulas that might conceivably prove acceptable to enough in our Congress to gain passage and take us on a strange detour around the messy experience of defaulting on our national debt.

But we are fooling ourselves if we think that cleverly side-stepping the default will allow us to pass through this economic soap opera unscathed. In truth, some damage has already been done.

It comes down to this. America has for many years held a privileged position in world credit markets and, by extension, in the world economy. Specifically, its debt—i.e., Treasury securities—have been the benchmarks for interest rates all over the world. Because American debt was backed by the full faith and credit of the United States, those who invested in Treasury securities believed that theirs was the safest investment available (short of, perhaps, gold), and those who set interest rate yields for other investments used Treasury yields as the guide to today’s other viable yields. Thus, for example, the 30-year fixed-rate has keyed itself to the yield on the 10-year Treasury note, with a margin of roughly 1.5% separating the two.

In other words, Treasury security yields created the goal posts and out-of-bounds marks for the world’s economic games. Without them, we don’t have referential guides for many of the important interest rates we use—even those for the simplest of borrowings.

You can see, therefore, that any damage done to Treasury securities as the basis for economic transactions pushes the markets in the direction of chaos. “No problem,” some self-styled analysts declare. “They’ll get over it.”

But what damage will be done in the meantime? Will the dollar still be the currency in which oil purchases are denominated? Will the dollar still be the main reference for most international trade? And here’s the truly big question: Will we still be capable of creating money from thin air? It’s one of the main things that has differentiated, say, American financial problems from those of Brazil, Argentina, Portugal and Greece. They can’t hide behind currency maneuvers; we can.

Are we, in our inability to reach an agreement that will raise our debt ceiling and begin to lower our burdensome national indebtedness, giving up far more than we seem to realize? The nation whose sovereign currency stands as the benchmark for world financial transactions must treat its position with care and respect. But at present, we’re not.

The damage could be far-reaching and long-lasting.

If, as is likely, the credit rating agencies dock the nation’s sovereign credit rating even slightly, investors are almost certain to demand a higher yield on Treasury securities. Our interest rates—including mortgage interest rates—will surely rise as a result…and our economy can ill afford that. Especially the real estate market.

Interest rates are waiting rather generously and patiently as Congress thrashes about, seeking some agreement—but sadly, the only obvious agreement thus far is that no one agrees on anything. People are arguing and voting for principles, rather than for actual pragmatic solutions, and we’re still very far from legislation to raise our debt ceiling and start trimming our national debt. It is getting more and more difficult to imagine pulling a stopgap bill out of a hat, even with a viable program being suggested by the so-called “Gang of Six.”

My point remains, though. Pandora is out of the box. The world can no longer be certain that Congress will give our nation’s debt obligation the rather hallowed priority it needs if we are to continue to generate benchmark interest rate yields and to maintain the privilege of creating money from thin air. And rising rates may result, no matter what Congress does at this point.

by: Bill Fisher

Daily Commentary by Larry Baer 7.22.2011

Commentary: Watching and waiting.

Many analysts believe lawmakers may reach a deal to raise the national debt ceiling as well as approve legislation providing for a significant package of government deficit spending cuts over the weekend.

If congressional authorization for the expansion of the country's debt ceiling is granted -- together with spending cuts of $2 trillion or more -- look for mortgage interest rates to rally strongly next week.

On the other hand -- an expansion of the nation's credit limits without major government spending reform -- will likely result in the loss of our AAA credit rating - a condition that within a couple of weeks of its occurrence has the potential to send mortgage interest rates notably higher. (There will likely be a little time lag between the actual event (should it occur) and the impact on your rate sheets while the global marketplace deals with the shock.)

The details of any agreement from Congress and the Administration are still nothing more than sheer speculation at this point - and it's the details that will influence the forward looking trend trajectory of mortgage interest rates the most. Until this veil of uncertainty is lifted - look for mortgage interest rates to move back and forth in a very tight trading range (for the week ending today - the price of the Fannie Mae 4.0% 30-year mortgage-backed security has traded within a very slight +/- 37.5 basis-point range of last Friday's close).

The coming week's macro-economic data will be completely overshadowed by financial decisions forthcoming from Congress and the Administration. But just so you know -- here is a quick look at the event calendar. June New Home Sales and July Consumer Confidence figures will be released on Tuesday. Wednesday will feature the June Durable Goods Orders numbers. The initial jobless claims number for the week ended July 23^rd and the June Pending Home Sales data will hit the newswires on Thursday and the week will round out with the government's revised quesstimate of second-quarter GDP together with the Employment Cost Index stats for the second quarter -- both due on Friday. From Tuesday through Thursday Uncle Sam will be in the credit markets looking to sell a total of $99 billion worth 2-, 5- and 7-year Treasury notes.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 7.21.2011

Commentary: New day - same old story. Trading activity in the mortgage market remains thin and lethargic.

The Labor Department reported this morning the number of Americans standing in-line to file first-time claims for government jobless benefits edged higher by 10,000 during the week ended July 16^th. Tragically, mortgage investors were spot-on with their expectations for further weakness in this week's round of employment data - a condition all ready reflected in current market prices. Even though the actual number was slightly stronger than consensus estimates calling for a week-over-week gain of 5,000 new claims - the report was "toothless" with respect to its impact on the current trend trajectory of mortgage interest rates.

Investors' attention has returned once again to watching for further signs that Washington lawmakers will reach a substantive agreement to reduce the country's ballooning deficit and raise the debt ceiling. The majority of credit market participants have no doubt approval for an expansion of Uncle Sam's borrowing power will be forthcoming from Congress by the August 2^nd deadline. The details of such an agreement are still very much in doubt - and it's the details that will influence the forward looking trend trajectory of mortgage interest rates the most. Until this veil of uncertainty is lifted - look for mortgage interest rates to move back and forth in a very tight trading range.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 7.20.2011

Commentary: Like yesterday - trading activity in the mortgage market is thin and sporadic.

The National Association of Realtors announced earlier this morning that sales of existing homes fell in June by a disappointing 0.8%. This drop is the third consecutive monthly decline and brings sales to their slowest pace since last fall. Even though the June sales invalidated the consensus estimate among economists calling for a gain of 1.8% -- mortgage investors apparently consider the June Existing Home Sales report nothing more than background noise against the din of market chatter surrounding the on again - off again congressional efforts to raise the national debt ceiling while simultaneously slashing government spending by a meaningful amount.

The majority of credit market participants have no doubt approval for an expansion of Uncle Sam's borrowing power will be forthcoming from Congress by the August 2^nd deadline. The details of such an agreement are still very much in doubt - and it's the details that will influence the forward looking trend trajectory of mortgage interest rates the most. Until this veil of uncertainty is lifted - look for mortgage interest rates to move back and forth in a very tight trading range.

For those who may be interested -- the Mortgage Bankers of America have released the mortgage application survey data for the week ended July 15^th. Overall loan demand was up 15.5% during the week - driven almost entirely by a sharp 23.1% increase in refinance loan requests. The number of applications taken for the purchase of a home fell by 0.1% during the period.

The contract rate for 30-year fixed -rate mortgages finished at 4.54%, down 1 basis point from a week ago, down 3 basis points from four weeks ago, and down by 5 basis points from year ago levels. Seven out of every ten loan applications taken last week were for a refi.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 7.19.2011

Commentary: The mortgage market is eerily quite this morning - trading activity is thin and sporadic.

The Commerce Department reported earlier today that homebuilding took a giant leap forward in June, with housing starts posting a 14.6% gain from May levels. The June gain is the strongest since the beginning of the year. Construction of single-family homes increased 9.4% while work on multifamily homes, such as townhouses and apartments, climbed 30% -- up a whooping 100% from this same time last year. Building permits, an indicator of future construction activity, posted a 2.5% gain for the period.

While the numbers of the housing sector look impressive on their face - in reality they represent only a fractional improvement off of their all-time historical lows. Mortgage investors shrugged this data off completely - since nothing in the numbers yet indicates the housing sector is doing anything more than bouncing along the bottom.

(The following is a repeat from yesterday's commentary.)

The stalemate in Washington continues to draw mortgage investors' undivided attention. The majority of credit market participants expect a dramatic "last-second-save" by Washington - with both political parties crowing about their success in diverting financial catastrophe for the nation. The probability is growing that meaningful and sustainable deficit reduction plans will be largely sacrificed in order to avoid a major national credit default.

The "so what" factor here is worth noting.

Without major deficit spending reform we will find ourselves as a nation asking our creditors to lend us more money - so we make next month's payment to them on the debt we already owe. Just because we have maxed out our national credit cards - spending more money than we make - is certainly no reason for us not to get an approval to increase our credit limit. And it is certainly no reason for our creditors to quit lending money to us at preferential rates. Right?

Perhaps such rationale is justifiable in the mind of those desperately trying to avoid the political heat implementing meaningful deficit spending reduction plans could/will generate during the upcoming 2012 campaign season. But for global investors in our sovereign debt -- the risk of an ultimate credit default by the United States will grow at an uncomfortable pace - and as that risk grows - the trend trajectory of interest rates on everything from Treasury debt obligations to mortgages will surely rise as well.

Just because the credit ceiling is raised does not mean that the bomb has been successful defused - the fuse will just not be burning quite as fast as it is right now. Here is why. Should the United States loose its coveted AAA credit rating by way of an unthinkable credit default - capital from around the globe will almost surely still flow into dollar denominated assets like Treasury debt obligations and mortgage-backed securities for a period weeks or months following our debt default. Realistically, where else is this capital going to go? We are at least one of the top four prettiest girls - and the argument could easily be made that we are still the prettiest girl - at the global credit markets dance.

Be patient - be disciplined - and play it by the numbers.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 7.18.2011

Commentary: The fuse has been lit on a major explosive device - and the audience is holding their collective breath hoping the good guys find a way to disarm the device before it goes off any creates all kinds of mayhem.

Just like the plot line from an old movie - the clock is ticking on congressional efforts to reach an agreement on raising the national debt ceiling before the United States finds itself unable to pay its service providers. The principal and interest owed to our creditors will undoubtedly be made - but without a debt limit increase - payments to government employees and funding for all manner of government service will either be late - or missed all together.

Credit market participants continue to expect a dramatic "last-second-save" by Washington - with both political parties crowing about their success in diverting financial catastrophe for the nation. The probability is growing that meaningful and sustainable deficit reduction plans will be largely sacrificed in order to avoid a major national credit default.

The "so what" factor here is worth noting.

Without major deficit spending reform we will find ourselves as a nation asking our creditors to lend us more money - so we make next month's payment to them on the debt we already owe. Just because we have maxed out our national credit cards - spending more money than we make - is certainly no reason for us not to get an approval to increase our credit limit. And it is certainly no reason for our creditors to quit lending money to us at preferential rates. Right?

Perhaps such rationale is justifiable in the mind of those desperately trying to avoid the political heat implementing meaningful deficit spending reduction plans could/will generate during the upcoming 2012 campaign season. But for global investors in our sovereign debt -- the risk of an ultimate credit default by the United States will grow at an uncomfortable pace - and as that risk grows - the trend trajectory of interest rates on everything from Treasury debt obligations to mortgages will surely rise as well.

Just because the credit ceiling is raised does not mean that the bomb has been successful defused - the fuse will just not be burning quite as fast as it is right now. Here is why. Should the United States loose its coveted AAA credit rating by way of an unthinkable credit default - capital from around the globe will almost surely still flow into dollar denominated assets like Treasury debt obligations and mortgage-backed securities for a period weeks or months following our debt default. Realistically, where else is this capital going to go? We are at least one of the top four prettiest girls - and the argument could easily be made that we are still the prettiest girl - at the global credit markets dance.

Be patient - be disciplined - and play it by the numbers.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Weekly Update by Bill Fisher 7.18.2011

This seems increasingly obvious, but it is worth repeating. There are many reasons the economy remains slow—the mess in Japan, the worries over debt problems in Europe, bad weather, the weak balance of trade with other nations, and on and on—but the bottom line is that we are emerging from decades of insidious debt growth and we’re trying to deleverage.

Most American citizens and their households are trying to get rid of debt and bring their finances into order—and, in far too many cases, trying to avoid a foreclosure on their underwater homes. American government at all levels is trying to reduce expenses and climb out of debt spirals. And American business, if not mired in debt, is all too aware that there aren’t enough financially strong customers out there to build a lasting recovery. So they have no basis for hiring more employees; they can only wait to see if sustainable sources of demand will develop.

Who, after all, is going to be the first to start spending his or her money? Virtually no one has the money to spend, and all of us are waiting for a meaningful source of income to develop. In the face of that, we see only the likelihood of further cutbacks. Our incomes are being trimmed, or the threat is in the air, almost constantly.

There are minor exceptions. The cost of gasoline has declined a bit, leaving us with a bit more disposable income. The cost of shipping, as a result of lower fuel costs, has also declined, resulting in lower food costs. The June Consumer Price Index actually fell by 0.2%. But when food and energy costs were removed, the index rose by 0.3%. This demonstrates how far the cost of food and fuel fell during the month.

Of course, this could change very quickly, so we have no assurance that lower food and fuel costs will persist and affect spending in the coming months. Indeed, we have very few assurances of anything at all right now, and recent consumer confidence surveys are reflecting the resulting confusion and negativity among consumers.

None of this is very difficult to understand. It seems to indicate that we’re simply going to have to slog our way through the deleveraging process. It will take time. Much more time than Mr. Bernanke and the rest of the Federal Reserve Board seem to have expected. And further, we should revise our sense of what recovery will really look like. (And this, I think, is one of the most important things being overlooked by most analysts.) We’re not heading toward an economy that—TA DA!—looks like the return of our most recent years of prosperity.

We’re not going to see home values rising at a furious pace, for example. We’re not going to see the inevitable goofs in home purchases—overestimating values, anticipating rapid inflation rises, taking on mortgage programs that backfire on borrowers—easily smoothed away by inflation. And buying a home won’t become the kind of profitable sport that we watched on late-night television programs and talked about at cocktail parties.

It is, and will remain, a sober time. And if we think we should trim away the consumer’s ability to participate in rebuilding our economy—with cuts in income and services, especially as supplied to the poor, to children, and to the elderly—we are simply not looking rationally at the current state of the economy. If we want money to go straight into the economy, we should extend jobless insurance a bit. Simple as that. If we want to make the process of deleveraging harder and worse on the economy—possibly leading to a downturn that makes the last one look easy—then we should continue to do all we can to raise the expenses of borrowing and trim away people’s ability to get financial help in our society.

In the 1930s, FDR explained how banking works in his weekly fireside chats. Without such leadership, we simply don’t have a population that understands what we are going through and why we have to make the difficult choices that are needed in order to expedite deleveraging.

by: Bill Fisher

RateWatch 7.15.2011

Daily Commentary by Larry Baer 7.15.2011

Commentary: Even though it is shaping up to be one of the hottest summers on record -- mortgage interest rates are starting to freeze in a period of uncertainty. Investors are simply so unsure which way to bet with respect to the raging congressional battle over debt ceiling extensions, deficit spending reduction and the potential of debt default by the United States they are simply choosing to do nothing.

I think the further we get into next week the harder it is going to be for mortgage investors to simply stand around with their hands in their pockets. The majority of market participants will likely decide the safest thing to do is to raise mortgage note rates high enough to slow production to a trickle. Once the federal debt ceiling has been raised - which it almost certainly will be - there will be plenty of opportunities to nudge rates lower if need be to ratchet up loan production levels again.

Speaking of debt ceilings and payment defaults - in the last couple of days I've run across some data I think many of you may find interesting.

The truth behind all the hand-wringing headlines is that the government has to service a monthly nut of about $15 - 20 billion in terms of interest and principal payments on outstanding debt obligations.

The government's monthly income is about $200 billion -- so there is virtually no way we'll default on our debt payments.

There is sufficient cash flow after debt service to cover Social Security and Medicare and Medicaid obligations of roughly $100 billion and still have more than enough to pay active duty troops and veteran benefits. There is even money left over sufficient to pay the combined $15 billion monthly obligation for food stamps and section 8 government housing.

It is just the 44% of other Federal expenses that may be hard to cover. The necessity here is obviously to cut government spending rather than increase the borrowing capacity. I heard someone say that is so very interesting the press sees the government's possible failure to raise the debt ceiling as far more serious -- than the possibility the government will accumulate too much debt.

More experienced credit market participants have largely shrugged-off all the political posturing and the attendant media swirl suggesting there is a chance the United States will fail to pay its creditors. In terms of a potential credit downgrade by the rating agencies - the vast majority of credit market participants readily recognize these are the same guys that gave subprime mortgages the highest performance rating possible.

Even if the United States lost is coveted Aaa credit rating - capital from around the globe would still flow into dollar denominated assets like Treasury debt obligations and mortgage-backed securities. Realistically, where else is this capital going to go? We are at least one of the top four prettiest girls - and the argument could easily be made that we are still the prettiest girl - at the global credit markets dance.

I think Warren Buffett had it right when he said he could resolve the deficit spending issue in five minutes. His recommendation is that we create a law that states that anytime the federal deficit exceeds 3.0% of GDP -- all sitting congressmen are prohibited from ever running for re-election.

Looking head to next week the intensity of the political pushing and shoving associated with raising the government debt ceiling will no doubt intensify - causing volatility in the mortgage market to ramp up. With respect to the economic calendar Wednesday's June Existing Home Sales data and Thursday's weekly jobless claims numbers will be easily overshadowed by all the congressional "dust" being generated by the attempt to get Uncle Sam's financial house in order.

Be patient - be disciplined - and play it by the numbers.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 7.14.2011

Commentary: The number of Americans claiming first-time unemployment benefits dropped 22,000 to 405,000. While the decline is certainly a move in the right direction -- until claims can penetrate and remain below the 400,000 mark for several consecutive weeks economists will continue view the labor market as exceptionally soft.

In a separate report the Labor Department said prices at the factory gate posted the steepest decline since February 2010 on the back of notably lower energy costs. The more important core rate of inflation at the producer level (a measure which excludes the volatile food and energy components) was unchanged from the May reading. Mortgage investors yawned.

The Commerce Department announced this morning that sales at the nation's retailers increased a very slim 0.1% last month. The gain was actually better than most economists had anticipated -- but overall the data continues to indicate reluctance on the part of consumers to spend.

The Treasury Department is set to wrap-up their three-part, $66 billion auction process today with the sale of a $13 billion stack of 30-year bonds. Most analysts expect today's sale to go well. The majority of credit market participants seem to be thinking either the economy will slow down enough to warrant additional stimulus from the Fed in the form of QE3 -- or the Fed will choose to do nothing with respect to additional stimulus and the economy will slow down. Either way, its good for bonds - and by extension it is good for the longer-term prospects of steady to perhaps fractionally lower interest rates.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 7.13.2011

Commentary: This morning Fed Chairman Bernanke told members of the House Financial Services Committee that the central bank is prepared to take additional action, including launching another bond buying stimulus program, if the economy shows additional signs of stalling. Mr. Bernanke was on Capitol Hill to deliver his semi-annual state of the economy assessment to both the upper and lower houses of Congress.

Bernanke told members of the House Financial Services Committee the central bank still has the necessary ammunition to aid the recovery if the recent economic weakness proves more persistent than policymakers currently expect. One option, Bernanke said, would be to pledge to hold rates at record lows and to maintain the Fed's balance sheet close to its record high of $3 trillion for a longer period of time. A second option for the central bank is to embark on a "QE3" round of government bond purchases, and yet a third option would be to reduce the interest rate the Fed pays banks on excess reserves parked at the central bank. There was nothing new in Mr. Bernanke's testimony or the follow-up question and answer period that most mortgage-investors had not already anticipated -- which made this event "toothless" with respect to its impact on the trend trajectory of mortgage interest rates.

Uncle Sam is back in the credit markets this morning looking to borrow $21 billion of 10-year notes. It appears there is a high degree of confidence among mortgage investors that the effects of a dismal June employment report and a revival of fears that the Greek sovereign debt problem is spreading to other euro zone countries has put the "flight-to-quality" shine back on dollar denominated assets like Treasury debt obligations and mortgage-backed securities.

The majority of mortgage investors are betting that even though the yield on today's ten-year note may not be as attractive as it was last month -- the sentiment among both domestic and foreign credit market participants so heavily favors safety and liquidity -- bidding for today's ten-year note offering will be aggressive. If this assessment proves accurate, today's event will almost certainly prove supportive of steady to perhaps fractionally lower mortgage note rates. On the other hand, if mortgage investors discover their rose-colored-glasses have totally distorted the credit market picture -- and today's 10-year note sale draws a mediocre or weak bid - mortgage interest rates will almost certainly finish the day notably higher than current levels.

It is a close call - but I think the majority of mortgage investors are probably a bit too optimistic - demand for today's ten-year note offering will likely be mediocre to weak -- resulting in fractionally higher rates before the day is over.

The final gavel will fall at 1:00 p.m. ET and I'll provide the auction results on my website as quickly as possible thereafter.

As they do every Wednesday, the Mortgage Bankers Association of America has released their mortgage application survey figures for the just completed week. The overall index dropped by 5.1% from the previous week led by another decline in the refinance component. Refinance demand fell 6.2% from the previous week even though the average contract for 30-year fixed-rate mortgages fell by 14 basis points. The demand for purchase money mortgages fell by 2.6% during the five business days ended July 8th.

The average contract rate for 30-year fixed-rate mortgages finished the period at 4.55%, down 14 basis-points from a week ago, up 4 basis-points from the month-ago mark and down by 14 basis points from this time last year. Refinance requests accounted for seven-out of every ten loan applications taken last week.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 7.12.2011

Commentary: In the day's early going mortgage investors are kicked-backed with their hands behind their heads and their feet on the desk as they whittle away the remaining hours before the Treasury Department completes their scheduled sale of $32 billion worth of 3-year notes at 1:00 p.m. ET.

This "devil may care" attitude is a bit surprising since the previous government debt auction featuring two-, five- and seven-year notes was such a huge bust. The weak demand at the late June sale of these debt instruments served to shove mortgage interest rates notably higher - (producing an almost 200 basis point swoon in the price of most mortgage-backed securities as last month drew to a close).

This time around it appears there is a high degree of confidence among mortgage investors that the effects of a dismal June employment report and a revival of fears that the Greek sovereign debt problem is spreading to other euro zone countries has put the "flight-to-quality" shine back on dollar denominated assets like Treasury debt obligations and mortgage-backed securities.

The majority of mortgage investors are betting that even though the yield on today's three-year note may not be as attractive as it was last month -- the sentiment among both domestic and foreign credit market participants so heavily favors safety and liquidity -- bidding for today's three-year note offering will be aggressive. If this assessment proves accurate, today's event will almost certainly prove supportive of steady to perhaps fractionally lower mortgage note rates. On the other hand, if mortgage investors discover their rose-colored-glasses have totally distorted the credit market picture -- and today's 3-year note sale is a bust - mortgage interest rates will almost certainly finish the day notably higher than current levels.

It is a close call - but I think the majority of mortgage investors probably have this one right - demand for today's three-year note offering will likely be strong enough to support at least steady mortgage interest rates.

The final gavel will fall at 1:00 p.m. ET and I'll provide the auction results on my website as quickly as possible thereafter.

The coming four business days are packed with three Treasury debt auctions, detailed public dissection of current domestic economic conditions by Fed Chairman Bernanke on Wednesday and Thursday, three major economic reports and a ticking clock on Congressional efforts to raise the national debt limit while simultaneously implementing a viable deficit reduction plan.

The $66 billion auction involving a combination of 3-year notes, 10-year notes and 30-year bonds is worrisome. The Treasury wrapped up their "QE2" $600 billion buying spree at the end of June. The coming auctions will be the first without the government presenting themselves as the largest, most aggressive buyer. Now the demand and supply equation will return to an unadulterated state - and that is a condition where the outcome of each auction is far less certain. It is a close call -- but I see reason to believe the coming government debt sales will find demand to be mediocre at best. If my assessment proves accurate, look for the upward pressure on mortgage interest rates to increase.

Market participants around the globe will tune-in to hear what Mr. Bernanke has to say about the current level of benchmark short-term interest rates, the pace of economic recovery, the job growth outlook and what, if anything, the Fed intends to do should economic conditions worsen as he testifies before two Congressional committees - one on Wednesday and the other on Thursday. Mr. Bernanke will attempt to walk a very fine line - sounding marginally optimistic with regard to the prospects for economic growth and job creation without coming off like a completely out-of-touch buffoon. If he is successful in this endeavor (a high probability outcome) -- look for this event to generate little, if any direct influence on the trend trajectory of mortgage interest rates.

The clock continues to tick down on Congressional efforts to raise the debt ceiling by August 2^nd or face the real possibility Uncle Sam might loose his enviable AAA sovereign debt rating. A failure to make meaningful progress on this issue by the end of the month has the potential to not only trigger a notable spike in interest rates - but it will very likely push the economy back into a recessionary spiral and send global financial markets into a panicked selling stampede. I am not saying such dire consequences will occur - I'm just outlining the risks associated if Congress fails to "get their collective act together." Against such a backdrop it doesn't take much of an imagination to see why mortgage investors may refrain from pushing mortgage interest rates notably lower until the current game of political brinkmanship has run its course.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Weekly Update by Bill Fisher

I understand (somewhat) and sympathize with the anguish over raising the American debt ceiling. But it is far too easy to condemn the creation of debt, as if certain people had been willfully overlooking our best interests. The fact is, we are all to blame—but we’re to blame for a system whose gradual creation we all colluded in. We are just now, very awkwardly, beginning to emerge from the Age of Debt, when we could sweep any excesses into the inflationary dustbin and watch them disappear. No one has participated at a more expensive level, of course, than our politicians. It is somewhat sickening, therefore, to watch them hold themselves above and superior to the debt creation that has taken at least fifty years.

Perhaps we can take the current political argument as a wake-up call telling us the game can’t be played by the same rules any longer. More likely, we can take it as an effort to have their cake and eat it, too, as the presidential candidates condemn a deal allowing the debt to rise while their party leaders negotiate just such a deal. This could allow Republican candidates to distance themselves from the deal, while at the same time allowing our economy to avoid the trauma of a default.

But a default on what exactly? Surely there would be no default on U.S. Treasury securities. (More on that potential nightmare in a moment.) So we would probably end up with delayed pension checks and, perhaps, wage payments—as if the members of the Armed Forces are ruining our economy by accepting paychecks. There is no solution to the problems created by a default that is not messy and damaging.

And most damaging of all would be a breach of payments on our Treasury securities. The insidiously powerful credit rating agencies would almost certainly rise up, twisting their moustaches, and downgrade American credit. That, in turn, would surely lead to higher interest rates, and we might then start down a very sorry road. Simply put, everything would cost more—especially credit—and the pay for most jobs would tend to decline.

The point here is that the dollar would lose some of its strength. The reason we have not joined Greece and Portugal in having our credit rating lowered and watching the cost of borrowing rise is that we’ve been able to print our own money. True, we can condemn this system as wasteful and foolish. But it’s the world we have been living in and continue to live in. We can gradually modify the rules, but we can’t change them overnight. We do so at our peril.

People are playing political football with our economy. The Economist, which I quote often and rely on for steady, conservative free-market views, said (specifically about the refusal to include higher taxes with spending cuts in trimming the deficits), “This is economically illiterate and disgracefully cynical.” I would suggest that what we see at work is a confusion of moral issues with the inevitable realities of economic life.

But again, I suspect we’ll see a deal fashioned by the party leaders…and then condemned by a party’s candidates. Do not look for sanity in this picture.

by: Bill Fisher

Daily Commentary by Larry Baer 7.11.2011

Commentary: Consider today to be the "calm-before-the-storm."

The coming four business days are packed with three Treasury debt auctions, detailed public dissection of current domestic economic conditions by Fed Chairman Bernanke on Wednesday and Thursday, three major economic reports and a ticking clock on Congressional efforts to raise the national debt limit while simultaneously implementing a viable deficit reduction plan.

The $66 billion auction involving a combination of 3-year notes, 10-year notes and 30-year bonds is worrisome. The Treasury wrapped up their "QE2" $600 billion buying spree at the end of June. The coming auctions will be the first without the government presenting themselves as the largest, most aggressive buyer. Now the demand and supply equation will return to an unadulterated state - and that is a condition where the outcome of each auction is far less certain. It is a close call -- but I see reason to believe the coming government debt sales will find demand to be mediocre at best. If my assessment proves accurate, look for the upward pressure on mortgage interest rates to increase.

Market participants around the globe will tune-in to hear what Mr. Bernanke has to say about the current level of benchmark short-term interest rates, the pace of economic recovery, the job growth outlook and what, if anything, the Fed intends to do should economic conditions worsen as he testifies before two Congressional committees - one on Wednesday and the other on Thursday. Mr. Bernanke will attempt to walk a very fine line - sounding marginally optimistic with regard to the prospects for economic growth and job creation without coming off like a completely out-of-touch buffoon. If he is successful in this endeavor (a high probability outcome) -- look for this event to generate little, if any direct influence on the trend trajectory of mortgage interest rates.

The clock continues to tick down on Congressional efforts to raise the debt ceiling by August 2^nd or face the real possibility Uncle Sam might loose his enviable AAA sovereign debt rating. A failure to make meaningful progress on this issue by the end of the month has the potential to not only trigger a notable spike in interest rates - but it will very likely push the economy back into a recessionary spiral and send global financial markets into a panicked selling stampede. I am not saying such dire consequences will occur - I'm just outlining the risks associated if Congress fails to "get their collective act together." Against such a backdrop it doesn't take much of an imagination to see why mortgage investors may refrain from pushing mortgage interest rates notably lower until the current game of political brinkmanship has run its course.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 7.7.2011

Commentary: A stronger-than-expected surge in the number of new jobs created in June sent mortgage investors scrambling to mark-down prices and mark-up rates earlier this morning.

According to data compiled by private payroll processing firm ADP -- the private sector added 157,000 workers last month - more than double the consensus estimate from economists calling for a gain of 70,000.

The Labor Department chimed in with some better than projected news of their own. According to government figures the number of Americans filing first-time claims for unemployment benefits dropped by 14,000 during the week ended July 2^nd. Most observers were expecting initial claims to have declined by 8,000 or so.

Mortgage investors were already more skittish than normal as the clock ticks down on the Congressional efforts to raise the debt ceiling by August 2^nd or face the real possibility Uncle Sam might loose his enviable AAA sovereign debt rating. A failure to make meaningful progress on this issue by the end of the month has the potential to not only trigger a notable spike in interest rates - but it will very likely push the economy back into a recessionary spiral and send global financial markets into a panicked selling stampede. I am not saying such dire consequences will occur - I'm just outlining the risks associated if Congress fails to "get their collective act together." Against such a backdrop it doesn't take much of an imagination to see why mortgage investors may refrain from pushing mortgage interest rates notably lower until the current game of political brinkmanship has run its course.

Be patient - be disciplined - and play it by the numbers.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 7.6.2011

Commentary: Trading activity in the mortgage market is relatively light today as mortgage investors turn increasingly cautious in front of the approaching potential debt default by the United States.

As you are probably aware, Democrats and Republicans have reached a rough agreement on billions of dollars in spending cuts but are at an impasse with respect to tax increases. Democrats want to increase taxes on wealthier Americans to help lessen the deficit, while Republicans refuse any tax increase, fearing the impact a tax increase would have on the already wobbly economy. Most analysts believe it will take substantive spending cuts together with a tax increase of some sort to convince global investors Americans' are serious about maintaining their enviable AAA sovereign debt credit rating. A failure to make meaningful progress on this issue by the end of the month has the potential to not only trigger a notable spike in interest rates - but it very likely will push the economy back into a recessionary spiral and send global financial markets into a panicked selling stampede. I am not saying such dire consequences will occur - I'm just outlining the risks associated if Congress fails to "get their collective act together." Against such a backdrop it will be difficult for mortgage investors to remain enthusiastic about pushing mortgage interest rates notably lower until the current game of political brinkmanship has run its course.

The economy limped into the end of the second quarter. Data released this morning from the private Institute of Supply Management showed the Service Sector Index for the month of June fell a larger-than-expected 1.3 points to 53.3%. The components of this report, a measure of activity in the nonmanufacturing sector of the economy, were not terrible but there were no meaningful signs suggesting the recovery gained any traction in the second-quarter. Mortgage investors had already "priced-in" this weakness and therefore it had little effect on rate sheets.

In a separate report, the Mortgage Bankers of America released their Mortgage Applications Survey for the week ended July 1^st. Overall mortgage applications fell 5.2% from the prior week driven by a sharp 9.2% decline in refinance loan requests. The drop in the composite index masked a solid 4.8% week-over-week gain in the number of purchase money applications.

The contract rate for 30-year fixed-rate mortgages finished at 4.69%, up 23 basis points from a week ago, up 15 basis points from four weeks ago, and up by 1 basis point from the year-ago mark. Refinance requests accounted for seven out of every ten loan applications taken last week.

Be patient - be disciplined - and play it by the numbers.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Weekly Update by Bill Fisher

The stock market provided an ambiguous gift for the birthday of our nation. Astonishingly, the Dow Jones Industrial Average rose by 5.4% last week, ending the week at 12582.77.

You are probably not asking what could be ambiguous about this—since you have been experiencing the fact that interest rates tend to rise when the news for the stock markets is good. And indeed, they did. The important 10-year Treasury note was up by 0.33% over the course of the week.

But it seems to me important not to get all wrapped up in this news. It doesn’t necessarily mean that rates have turned around, nor does it suggesting that stocks will continue to climb. As always there are further economic indicators on the horizon, and they could turn this past week’s crop of interest rates and stock indices on their heads in a moment, given the chance.

It seems that the strong ISM numbers, suggesting that the manufacturing sector is pulling out of its relative small trough, were one of the key stimulants for higher stock prices. The Wall Street Journal quoted Peter Cardillo, chief market economist at Avalon Partners, declaring, “This is a great indication that the manufacturing sector is turning around. I expect manufacturing will take us out of the soft patch and lead economic growth in the second half of the year.”

Hope he’s right. But the sober—and therefore mildly cynical—among us know all too well that disappointing employment figures this coming Friday could throw a wet blanket over the stock market gains of this past week. And we don’t have much reason for serious hope regarding the next set of employment figures.

Further, supporting the economic optimism this past week was the fact that the Greek Parliament somehow voted in a set of extremely unpopular cost-cutting and tax-raising measures. It seemed as if most of those who weren’t voting were out in the streets, throwing rocks at riot police. In some polls, as many as 87% of Greek voters were very much against the austerity package. If anything, that number could grow as the effects of the measures are felt.

The measures were voted in, though, because the next loans to Greece would not be forthcoming without the austerity measures voted for. And this raises a great deal of concern in most observers, rather like watching pets behave because they are being kicked. Pretty soon, the pets turn on the kickers.

In its analysis, The Economist newsweekly continues to predict that this game cannot go on much longer—and that the longer it goes on, the more expensive it becomes for all concerned…for those whose investment in Greek debt may never be fully repaid, for the international banks whose balance sheets could be thrown into doubt and disrepair by a sovereign default, and for the Greeks, whose social fabric is ripping at the seams and who could face a horrendous depression as the result of a default. And I should add this: For us, as we watch our credit markets take a series of hits.

Against these possibilities, a rise in the ISM Index seems small stuff, to say the least. We have a dying elephant in the living room. The markets still seem prepared to ignore it whenever they can. It looks increasingly certain that they won’t be able to ignore it—even for brief times in which the stock markets rebound—much longer.

The Economist suggests an orderly restructuring of the Greek debt while that is still possible. It’s a persuasive suggestion.

by: Bill Fisher

Daily Commentary by Larry Baer 7.5.2011

Commentary: Looking ahead to the coming week the economic calendar has been arranged to provide a little extra time for traders to nurse sunburns and other Fourth of July related aliments before trading activity levels accelerate again. The first "big" economic report of the week lands on Wednesday with the release of the June Institute of Supply Management's Service Sector index -- followed by the even "bigger" June Nonfarm Payroll figures on Friday. If either report proves stronger-than-expected, (a headline number of 54.0% or more for the ISM Service Sector Index and a nonfarm payroll figure of more than 90,000) look for investors to shove mortgage rates fractionally higher from current levels. As I write, stronger-than-expected numbers for either report is considered by most analysts to be a low probability outcome.

In the run-up to Friday's nonfarm payroll report trading action in the stock markets will be exerting a strong influence on the trend trajectory of mortgage interest rates. In my judgment the Dow will probably "top-out" this week somewhere between 12,550 and 12,800 before turning notably lower into the first week or two of August. If my assessment proves accurate, the coming equity market sell-off will almost surely prove supportive of steady to perhaps fractionally lower mortgage interest rates.

Be patient - be disciplined - and play it by the numbers.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME