Record Auctions Produce Mixed Results

While daily volatility was high this week, mortgage rates ended just slightly lower than last week. The primary factors influencing mortgage rates were offsetting. The economic growth data released this week was stronger than expected, but inflation remained low. While the first two Treasury auctions produced impressive results, the final one was relatively weak.

Demand was extremely strong for this week's 2-yr and 5-yr Treasury auctions, but it slacked off considerably for the 7-yr securities. When demand is low, higher yields are required to attract investors. In addition, the Treasury is interested in shifting its issuance toward a greater percentage of longer-term securities relative to shorter-term securities to lock in currently low rates.

For mortgage markets, though, a move in this direction would add to the supply of competing investments. The Fed is already in the process of winding down its purchases of mortgage-backed securities, removing demand from the market. Higher supply of long-term investments and lower demand would pressure mortgage rates higher.

Government influence on mortgage markets has been substantial. It has pushed mortgage rates to historically low levels and has made credit available where it might not be otherwise. Two important programs, the first-time homebuyer tax credit and the extended conforming loan limits, were set to expire soon. Fortunately, both programs received strong support from lawmakers this week and are likely to be extended.