Commentary: The flow of capital fleeing the sell-off in the global stock markets is flowing into the mortgage market and is single-handedly driving today's rally.
As I'm sure you are aware by now - after the market close last Friday Standard and Poor downgraded the U.S. credit rating to AA-plus from the top-notch AAA. The heavy selling in our domestic stock markets is currently being driven by nothing but panic created by the move by Standard and Poor. There are no fundamental reasons for a selloff. The economy is traversing through a difficult period of time - but so far there are no signs we are tipping over into another recessionary spiral. Corporate America's balance sheets haven't been in as good a shape as they are now in decades. Earnings season was terrific.
I strongly suspect the heavy sell-off in the stock market may come to a rather abrupt stop as more experienced and sophisticated players step in to buy stocks at "fire-sale" prices. In my judgment, should the Dow Jones Industrial Average close above 11,250 -- I think significant amounts of capital will return to the stock markets at the expense of the government debt and mortgage-backed securities. As we witnessed last week Friday when prices collapsed by roughly 100 basis-points in the mortgage market - "flight-to-quality" money can flow out just as fast as it flows in. Look for mortgage market price volatility to be exceptionally high this week.
While today's rally in the mortgage market is certainly welcome - I strongly urge you not to get complacent regarding the prospects for dramatically lower mortgage interest rates. Investors' attention will shift before the day is over to tomorrow's Federal Open Market Committee meeting and the Treasury's $72 billion three-part debt auction scheduled to run from Tuesday through Thursday. The auction will feature $32 billion of 3-year notes, $24 billion of 10-year notes, and $16 billion of 30-year bonds.
As I mentioned in this week's edition of "ViewPoint" - I believe the Treasury auctions will trump all other events on the macro-economic calendar. If investor demand is puny - particularly at Wednesday's sale of 10-year notes and Thursday's offering of 30-year bonds - the probabilities are strong mortgage interest rates will reverse course and begin to creep higher from current levels. Heads up.
THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
