The credit market is undergoing a technically driven adjustment this morning as last week’s $67 billion of Treasury obligations and the biggest supply of long-dated corporate debt issues since last March are redistributed by primary dealers and big-money center banks. Risk management strategies established prior to the deluge of supply washed into the credit markets last week are being reversed this morning as well – contributing in part to the early rally in the Treasury and mortgage-backed securities markets.
The mood of mortgage investors is changing as they sweat out their recent security purchases made at, or very near all-time historically high prices. From this point forward economic news that proves to be “less-bad” than expected will likely produce a much stronger move by investors to push prices down and note rates higher as they scramble to avoid the financial pain that will be inflicted on those caught holding a portfolio of low note-rate mortgages should the macro-economic news show potential improvement.
The slightly elevated August Retail Sales figures expected from the Commerce Department at 8:30 a.m. ET tomorrow have already been priced into the mortgage market. The modest improvement in the ex. auto component of this report was likely driven almost exclusively by back-to-school discounts from businesses and the impact of tax-free holidays in seventeen states designed to support retail sales. Mortgage investors will probably view this data as too distorted to provide a real sense of the current level of domestic consumerism. If so, this report will not likely influence the direction of mortgage interest rates one way or the other tomorrow. In the unlikely event the August Retail Sales figures exceed the consensus estimate -- look for investors to respond by pushing prices lower and note rates higher before the end of Tuesday’s trading session.
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