Daily Commentary by Larry Baer: Mortgage investors completely shrugged off this
morning's slightly softer-than-expected Institute
of Supply Management Service Sector Index
and are now busy putting the final touches on their risk management positions
in front of Tuesday evening's national election results.
As I mentioned in
this week's edition of my weekly newsletter "ViewPoint" -- mortgage
interest rates will likely trade in a very narrow range during the run-up to
Tuesday's election. Most traders will likely choose to remain on the
sidelines as they await the official results.
Over the longer-term
the mortgage market - as well as the stock market - tends to be
apolitical. Yet in the short-term, election results may create some
volatility.
I am not a political
pundit nor am I endorsing or campaigning against any candidate - that is a
choice for you to make - without influence from me or anybody else. My
responsibility, as I see it, is to help you and your borrowers anticipate
changes in the direction of mortgage interest rates. As I mentioned
earlier in this commentary the post election results may, temporarily, create
some noticeable volatility in the mortgage market.
Financial commentary
across the world seems to have converged on the loose assumption that a Romney
victory would be good for stocks and an Obama re-election would tend to favor
steady to perhaps lower interest rates on everything from Treasury debt
obligations to single-family mortgages.
A Romney victory
would likely make it easier for the country to dodge the looming December 31st
"fiscal cliff" because of the support almost certain to come his way
from the Republican dominated House of Representatives. By removing the
fiscal uncertainty with a pro-business tilt, it is assumed corporate planning
will resume and lead to a surge in pent-up corporate spending which would then
ultimately prove supportive of higher stock prices - a condition which in-turn
is likely to push mortgage interest rates higher as capital moves into riskier
asset classes.
Flip that around for
an Obama victory. A deeper political divide on taxes and spending between
the White House and Congress could drag the country perilously close to falling
off of the "fiscal cliff" - a condition likely to support
"safe-haven" buying of Treasury debt obligations and agency eligible
mortgage-backed securities - a process that tends to be supportive of steady to
perhaps fractionally lower mortgage interest rates.
No matter who wins
Tuesday's election the government will still have the deal with the fast
approaching December 31st arrival of a "perfect storm"
combination of tax increases and mandated governments spending cuts - broadly
referred to as the "fiscal cliff." Irrespective of the party
affiliation of the president-elect - the response of the government - or lack
thereof - to this critical deadline will have profound economic consequences
for all of us.
The lack of a
bi-partisan resolution to this "fiscal cliff" issue could easily and
quickly push our economy back into a deep and prolonged recession. The
good news part of this story is that mortgage interest rates will almost
certainly remain at or near modern history lows - the bad news is that overall
mortgage loan demand will likely plummet. Let's all hope that the
nation's political leadership will set aside the desire to make political hay
for their respective parties and respond to this fiscal crisis with the
long-term well being of the nation as the primary objective. I know that
is asking for a lot - but if you're going to hope - hope big -- right?
The balance of this
week's exceptionally light macro-economic calendar will be overshadowed by
investors' reaction to Tuesday's election results together with the onslaught
of $72 billion of debt supply from Uncle Sam. The Treasury
Department will be in the credit market on Tuesday looking to sell $32 billion
of three-year notes, followed by the sale of $24 billion of 10-year notes on
Wednesday and the three-part auction series will conclude on Thursday with the
sale of $16 billion 30-year bonds. It appears corporate America
will be exceptionally active in the credit markets next week as well. All
this inbound supply may create a major case of indigestion for buyers. If
this assessment proves accurate, the upward pressure on mortgage interest rates
will likely increase as the week progresses.
THE
MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
