Commentary: According to data compiled by Daniel Kruger and John Detrixhe, columnist for Bloomberg.com, Wall Street's biggest bond traders are stockpiling longer-dated Treasury debt obligations at the fastest pace since 2007 on speculation the Federal Reserve will announce a plan to buy longer-dated government debt issues in an effort to spur the faltering economy. There traders are anticipating the Fed will announce a new bond-buying program nicknamed "Operation Twist."
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 of this fancy financial footwork may prove supportive of fractionally lower mortgage rates - but the effect will not likely last long.
As I mentioned in this space on Friday -- fixed income investors live in the future, not in the present. These investors 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 fuel economic growth - even at the expense of sharply higher inflation. Since inflation eats away at investors' profits on long-term fixed-income investments - any increase in inflation pressures begins to diminish the total returns investors were expecting to generate when they initially committed capital to the asset class. It is possible for inflation pressures to swell to a point where it becomes financially compelling for fixed-income investors to redeploy their capital into riskier but potentially 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, there is nothing currently available to suggest things will be different this time around.
The mortgage market is also finding support this morning from a growing fear Greece may default on their sovereign debt - possibly within the next couple of weeks. A significant amount of international capital has elected to flee European and other global markets for the relative safe-haven of dollar-denominated assets like Treasury debt obligations and mortgage-backed securities. This so-called "flight-to-quality" flow of capital into our domestic credit markets is a condition that tends to temporarily support steady to perhaps fractionally lower mortgage interest rates.
THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
