Market Analysis

Below is Larry Baer with Market Alert's commentary for today:

Larry Baer: The trend trajectory of mortgage interest rates for at least the next week of so hinges on what, if anything, the Federal Open Market Committee has to say about its commitment to ease interest rates through other means than short-term interest rate cuts.

As you probably already know, the Fed's benchmark fed fund rate is near zero - so the probability of further mortgage market friendly short-term rate cuts is non-existent. Mortgage investors expected the Fed to affirm in their post-meeting statement this afternoon that short-term interest rates will remain unusually low for an extended period of time. I think it would be reasonable to assume the anticipated outcome is "baked-in-the-cake."

The big question in market participants' minds is whether the Fed will reiterate and formalize its commitment to reduce interest rates by becoming a direct buyer of longer-dated government debt. Yesterday's big rally in the bond market and the follow-up improvement in this morning's mortgage market are both reflections of investors hopes that this afternoon the policymakers will offer friendly remarks about the central becoming entering the credit market as a buyer of long-dated government securities.

Last month the Fed explicitly promised it would explore other options of using its balance sheet to support credit markets and growth through direct purchases of long-date Treasury obligations. Fed Chairman Bernanke and other members of the Federal Open Market Committee have spoken of this possibility several times recently. Not all Fed policymakers are onboard with the aggressive manner in which the Federal Reserve Bank's balance sheet has grown through credit extensions to banks, the commercial paper markets and the direct purchase of mortgage-backed securities.

Be very cautious here. I appears to me that the Treasury market has already priced in expectations the Fed will either outright announce their intention to become a major buyer of longer-dated government debt or they will at least indicate the concept is still under consideration. Either way, most of the market driving power behind the event will have been spent - a least for the next couple of days. On the other hand, if the Fed doesn't say anything about considering the purchase of long-term treasury obligations - look for a rather strong sell-off in the Treasury market to develop almost immediately. Falling prices in the treasury market will almost certainly generate upward pressure on mortgage interest rates.