Congratulations to our new president elect, Barack Obama!  Yes We Can!

Lost in all the post-election buzz the morning was an announcement from the Treasury Department that it will sell a record $20 billion of 10-year notes, $10 billion in 30-year bonds, and $25 billion in three-year notes next week.  It seems market participants did not even notice that the Institute of Supply Management's Service Sector Index posted a much larger-than-expected decline, falling to a reading of 44.4 versus the consensus estimate for a figure near 48.0.  Last but not lest, the Mortgage Bankers of America's mortgage application index was all by completely overshadowed.  The aggregate index of mortgage applications fell by 20.3% last week as refis tumbled 27.8% lower and purchase applications slumped by 13.9%.   That's the bad news.

The good news is that we are getting a little follow-through from yesterday's "relief" rally in the mortgage market.  Investors are relieved the uncertainty surrounding the political environment that will influence our domestic capital markets - and to a lesser degree the global markets - for the next four-years has been resolved.  Market participants are always far more comfortable with a devil they know - rather than a devil yet to be defined.   The likelihood of an Obama victory and a Democratic Congressional majority was largely priced into the mortgage market yesterday - and the price improvement we're seeing this morning probably represents the wind-down of that election-day relief rally. 

Our new leaders will certainly have their hands full when they officially take over the reins of government on January 20^th.  Current leadership has all ready committed trillions of dollars in an effort to avert a financial system meltdown.  The ramped up borrowing need the rescue programs have generated is expected to push the national debt well above $11 trillion.  The probabilities are high that our domestic budget deficit will exceed 7% of our gross domestic product next year, more than double this year's deficit, and if projections are accurate, the budget deficit next year will be the highest in the developed world.

The "so what" factor behind all this mumbo-jumbo is that China and Japan are among the largest holders of U.S. debt - debt that they have suffered some rather significant losses on lately.  I suspect as these two countries are asked to take a major stake in financing the largest American budget deficit in history -- they may be more than just a little wary of extending significant amounts of new funds too aggressively.  If my assessment proves accurate, the probability that interest rates will rise as we finish out this year and move into next year is considerably higher than the likelihood that interest rates are poised to move notably lower.   Heads up.

Today's conforming 30 year fixed rate is at 6.00%.