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 2nd 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
