New Fed Chair Debut!

Janet Yellen had a successful and generally uncontentious debut as Chair of the Federal Reserve.  As expected, she said more work needs to be done to restore labor market health and she pledged to maintain her predecessor's policies by scaling back QE3 in "measured steps." 

            The selling that has developed in the mortgage market this morning is not in response to anything Mrs. Yellen did, or did not say - but rather by the process of investors adjusting prices as they prepare to accommodate $70 billion of new incoming supply into the credit markets.

            Uncle Sam will be conducting a three-part, three-day $70 billion Treasury debt auction running from today through Thursday.  The sale will feature 3- and 10- year notes together with 30-year bonds. 

            The Fed has reduced their buying appetite for these securities by $10 billion over the course of the past two months - with plans to reduce the size of direct market participation even further in coming months.   This process makes it highly probable Treasury prices will edge fractionally lower (creating rising yields) as a result.  Just like the knee-bone is connected to the shin-bone -- rising Treasury yields tend to put upward pressure on mortgage interest rates.

            The macro-economic calendar is lightly populated with Thursday's initial jobless claims and January Retail Sales figures taking center stage -- followed on Friday by the January Industrial Production and Capacity Utilization numbers.   None of the scheduled reports are expected to paint a picture of accelerating economic growth.  If the forecasts prove accurate, the coming economic data is unlikely to put significant upward pressure on mortgage interest rates.

            The "wild card" of the week will once again be trading action in the stock markets.  Most timing models are suggesting a better than 90% probability the Dow will put in a short term (16 days or less) high before the week is out - somewhere in a range between 15,900 and 16,100.  If this assessment proves accurate, selling pressure in the stock markets should prove supportive for the prospects of steady to perhaps fractionally lower mortgage interest rates.