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 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
