Daily Commentary by Larry Baer 10/26/2009

Daily Commentary
By Larry Baer, Market Alert

SHORT-TERM TREND (10 days or less). Favors higher rates and lower investor prices.

LONG-TERM TREND (11 days or more) Favors higher rates and lower investor prices.

Commentary: The mortgage market was under siege earlier this morning as stock market gains curbed the safe-haven appeal of government debt obligations and mortgage-backed securities. The last thing the credit markets need is a distracting influence as Uncle Sam prepares to borrow a record volume of $123 billion in a four-part auction this week.

The government's borrowing binge will kick-off today with $7 billion of 5-year inflation-indexed securities followed by tomorrow's $44 billion in the form of 2-year notes, Wednesday's $41 billion of 5-year note sale and concluding on Thursday with a $31 billion 7-year notes offering.

So far this year, domestic and foreign investor demand for these debt obligations has been high - despite lingering anxiety over a ballooning U.S. government budget deficit and its potential impact on the long-term credit-worthiness of the United States. As we come into this week's record setting debt offering the credit markets have a couple of things going for it that I consider supportive of the prospects for solid auction demand - a condition which also tends to be supportive of a least steady mortgage interest rates.

(1) The stock markets appear to be in the early phase of a mild downward correction. If my assessment proves correct this relatively shallow correction that will likely continue through the Thanksgiving break. Falling stock prices tend to spawn "flight-to-quality" buying sprees favoring safe haven assets like government debt obligations and mortgage-backed securities. There is absolutely no reason to believe a swoon in the stock markets would not create the same result this time around.

(2) The value of the dollar has taken a beating on foreign currency exchanges -- and believe it or not - that is a situation that may actually serve to ramp-up demand for U.S. government debt obligations - especially by overseas investors. Those investors choosing to buy dollar-denominated assets with other more strongly valued currencies will be acquiring Uncle Sam's highest-quality debt instruments at "blue-light-special" prices -- on a currency adjusted basis. A soft dollar stands a very good change of greasing-the-skids for this week's barrage of Treasury auctions - a scenario that will likely prove to be at worst -- mortgage market neutral.

There is, of course, a second side to this coin. If domestic and foreign investors choose to stay on the sidelines this week for whatever reason - look for mortgage interest rates to move higher. While such an outcome is certainly possible - at this juncture it does not appear to be highly probable.

I'll provide auction results as soon as possible following the conclusion of bidding on today's 5-year inflation indexed note offering at 1:00 p.m. ET.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME