Daily Commentary by Larry Baer 10/28/2009

SHORT-TERM TREND (10 days or less). Favors lower rates and higher investor prices but vulnerable to a near-term pull-back.

LONG-TERM TREND (11 days or more) Titled slight in favors of lower rates and higher investor prices.

Commentary: The mortgage market got off to a friendly start this morning as lower-than-expected September new home sales figures offset encouraging data from the manufacturing sector that came in the form of surprisingly solid September Durable Goods numbers.

In a separate report the Mortgage Bankers of America reported their index of seasonally adjusted mortgage applications (a value that includes requests for both purchase and refinance loans) slipped 12.3% lower during the week ended October 23rd. Purchase applications were down 5.2% and refinance applications declined 16.2%. During the reporting period the average 30-year fixed-rate mortgage was 5.04%, down three basis-points from the prior week -- and down 122 basis-points from the year ago mark.

The mixed signal from the economy was enough to induce a round of selling in the stock markets. As capital leaves riskier asset classes like stocks - it is typically looking for a safe place in which to hang-out - and that is a condition that tends to make government debt obligations and mortgage-backed securities shine as an attractive sanctuary for these money flows. The more money that flows into the credit markets - and particularly into mortgage-backed securities - the more supportive it becomes of the prospects for steady to perhaps fractionally lower mortgage interest rates.

The timing of ramped-up selling pressure in the equity markets could not have come at a better time from a credit market perspective. Uncle Sam is conducting an auction today looking to borrow $41 billion in the form of 5-year notes. The more aggressive the bidding becomes for these securities -- the better the prospects for steady to perhaps fractionally lower mortgage interest rates. The first two legs of this week's Treasury auctions - Monday's $7 billion of 5-year inflation indexed securities and yesterday's $44 billion of 2-year notes - drew slightly better-than-expected demand. If today's 5-year note sale keeps the string alive this event's impact on the trend trajectory of mortgage interest rates will likely be very limited. In the off-chance today's 5-year note sale is a bust - look for mortgage interest rates to edge higher before the end of the day. I'll provide an update with the auction details as soon as possible following the conclusion of bidding at 1:00 p.m. ET.

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