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
