Market Analysis

Yesterday was an adjustment day for mortgage investors.  Typically there is a small event which triggers a mindshift.  Yesterday, that event was the Treasury dept announcing that it would be auctioning $126 billion in government notes next week, which was a larger supply than the market had been anticipating.

If one factors in ever-increasing government debt auctions, the Fed stepping away from mortgage-backed security purchases and China's slow tapping on the brakes of their US debt purchases, the support for 30 year fixed mortgage rates in the high 4's does not appear to be sustainable, barring a major correction in the stock market which would drive a "safe haven" flow of money to US Treasury debt and Fannie and Freddie mortgage-backed securities (MBS).

For icing on the cake, yesterday evening in what was more of a symbolic move than a strategic action to raise rates, the Federal Reserve raised the discount rate, the rate it charges banks seeking emergency loans, by a quarter-percentage point, to 0.75%.  According to CNN Money, "The bank said the change reflects improvements in the economy and not a move toward tighter policy. Fed Chairman Ben Bernanke indicated a move was coming last week. However, such changes typically don't occur between Fed meetings and the timing of the move surprised markets. The move doesn't have much impact on a day-to-day basis and won't impact consumer or corporate borrowing costs. The more widely used fed funds rate, the overnight rate banks charge each other, is expected to remain at historic lows near zero for the foreseeable future."