Strong Demand for Treasuries
Last week, the Dow fell about 700 points, and investors moved funds to relatively safer investments, including mortgage-backed securities (MBS), which helped mortgage rates to move lower. This week, it was nice to see that the Dow recovered most of last week's losses, yet mortgage rates retained last week's improvement, ending the week nearly unchanged. Strong demand for this week's Treasury auctions was a major reason why mortgage rates held steady despite the rising stock market.
As the government spends more money on programs to boost the economy, it must sell additional Treasury bonds to pay for the programs. As a result, the size of the Treasury auctions has increased, and investors have been watching closely for signs that demand will keep up. This week's strong demand for the Treasury auctions eased investor concerns for now. Both domestic and foreign investors indicated a high level of interest in purchasing Treasuries.
Longer-term, concerns remain about the level of foreign demand for US Treasuries. Countries such as China have been hurt by the global economic slowdown and are spending large amounts on domestic fiscal stimulus programs, leaving them with a smaller surplus to purchase foreign securities. Investors will be keeping an eye on the level of foreign interest in buying US debt. If demand for US Treasuries falls, then interest rates on Treasuries and mortgages will likely move higher.
The big economic news next week will be Wednesday's Fed meeting. With the Fed Funds rate close to zero, cutting rates is no longer an option, but the Fed may announce other measures to stimulate the economy. The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of "intermediate" goods used by companies to produce finished products and will come out on Tuesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Wednesday. CPI looks at the price change for those finished goods which are sold to consumers. Industrial Production on Monday and Housing Starts on Tuesday also will be important reports.