Strong Treasury Auctions Lower Mortgage Rates

With a light schedule for economic data, Treasury auctions had the greatest impact on mortgage rates during the week. Strong demand for the auctions and declines in the stock market helped mortgage rates end the week lower.

In recent months, mortgage rates have been heavily influenced by concerns about the enormous amount of debt the government needs to issue to pay for all the stimulus programs. The risk is that investors will require significantly higher yields to continue purchasing an expanding supply of bonds. Strong demand from both domestic and foreign investors at this week's 3-yr, 10-yr, and 30-yr Treasury auctions eased those concerns. Longer-term Treasuries are comparable investments to mortgage-backed securities (MBS), which are the basis for the level of mortgage rates, so the results from 10-yr and 30-yr auctions are particularly important. The willingness of investors to purchase longer-term bonds (including Treasuries and MBS) at the current low rates is very encouraging.

Also this week, there was mounting speculation about the passage of a second round of fiscal stimulus before the end of the year. Given the weaker than expected June Employment data, the political pressure is increasing to take additional steps to create jobs. If another stimulus package is passed, the increase in the supply of debt required to pay for it could pressure mortgage rates higher.

Also Notable

* Continuing Jobless Claims rose to a record high

* The May trade deficit fell to the lowest level in nine years

* Fed Chief Bernanke performed well during Congressional questioning

* Oil prices fell to $60 per barrel, down from a recent high of $74 per barrel

* The Fed purchased $17 billion in agency MBS during the week ending 7/8

The Week Ahead

The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of "intermediate" goods used by companies to produce finished products and will come out on Tuesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Wednesday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Retail Sales will be released on Tuesday. Retail Sales account for about 70% of economic activity. Industrial Production, another important indicator of economic activity, will be released on Wednesday. The FOMC minutes from the June 24 Fed meeting will also come out on Wednesday. These detailed notes on the discussion at the meeting often reveal additional insight into the Fed's actions. Finally, Housing Starts is scheduled for Friday.

Mortgage Time is courtesy of MBSQuoteline.com.

To learn more about news impacting interest rates and mortgage markets, go to www.mbsquoteline.com

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