Commentary: Trading action is very thin in the mortgage market this morning. Most mortgage investors are quietly squaring-up their risk management positions in front of next week's much anticipated two-day Federal Open Market Committee meeting.
Fed Chairman Ben Bernanke and his fellow central bankers will huddle for two-days of monetary policy deliberations on Tuesday and Wednesday. There is still some hope among some market participants the Fed will announce a new bond-buying program nicknamed "Operation Twist" -- but few traders are betting money on it.
If the Fed does choose to launch such a program to stimulate the economy the central bank will soon begin conducting a number of special auctions where they buy longer-dated Treasury securities with proceeds derived by selling shorter-dated securities. The buying and selling process would occur over the course of the same day and is intended to push long-term rates - including mortgage rates -- lower. The sources I talk to tell me the initial novelty effect of this fancy financial footwork may be supportive of fractionally lower mortgage rates - but the effect will not likely last long.
Fixed income investors live in the future, not in the present. They are keenly aware that every move the Fed, Congress and all the other financial powers in the world make from this point forward will be designed to simulate economic growth - even at the expense of sharply higher inflation. Since inflation eats away at investors' profits on long-term fixed-income investments like a high-school football team at an "all-you-can-eat" pizzeria - as inflation pressures increase - investors returns diminish to a point where investors will find it necessary to redeploy capital into riskier but higher yielding alternative investment opportunities.
The moral of this story is simple and straightforward - stimulus programs - especially effective stimulus programs - almost always mark the beginning-of-the-end of a move to lower mortgage interest rates. At this juncture, I see nothing to suggest anything will be different this time around.
Looking ahead to next week's economic calendar - the post-meeting statement the members of the Federal Open Market Committee will issue at 2:15 p.m. ET on Wednesday will likely exert the strongest single influence on the near-term trend trajectory of mortgage interest rates. The expected interest rate neutral August Housing Starts and Building Permits numbers on Tuesday together with the August Existing Home Sales data on Wednesday will probably draw nothing more than a passing glance from mortgage investors.
THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
