Mortgage Backed Securities have lost some steam as we get close to the
auction results.  Trading activity is thin this morning as investors await the results of this
afternoon’s $16 billion sale of 30-year bonds by the Treasury Department.
This auction represents the last leg of a record-sized $81 billion
three-part borrowing spree by Uncle Sam.  The Treasury sold $40 billion of
3-year notes on Monday and $25 billion of 10-year notes on Tuesday.  The
10-year sale drew decent demand while the 3-year note auction generated the
strongest buyer appetite in more than 20 years.

One group of analysts is arguing the falling dollar will lure bargain
shopping foreign investors in droves to today’s 30-year bond sale. The
opposing camp is equally convinced that now that the Fed is no longer
actively adding to their fixed-income portfolio, these longer-dated
securities will likely require higher yields to attract the necessary
capital.

Everyone will be watching intently to see if demand steps up on its own.
If so, interest rates in general — and mortgage interest rates in
particular –will likely remain unchanged.  On the other hand, if
private demand is weak — mortgage investors will almost certainly register
their displeasure by pushing mortgage interest rates noticeably higher.

In other news of the day – the government reported the number of workers
filing new claims for jobless benefits dropped by 12,000 last week.  The
four-week moving average of new claims, considered a better gauge of
underlying trends, fell by 4,500 for the period.  During the latest week for
which data is available (week ended October 24th) enrollment in extended
benefits programs decreased by 28,240 while the Emergency Unemployment
Compensation program enrollment rose by 22,400.

Behind all this statistical mumbo-jumbo a story of very gradual improvement
in the labor sector is beginning to emerge. Even so, it will likely be an
extended period of time before the worst collapse in the labor sector since
the Great Depression is declared officially over.  Recent economic
improvement has to be sustained for many months for hiring to resume, as
businesses first increase existing worker hours and bring on temporary
workers before increasing payroll head count.  The majority of analysts
firmly believe it will be well into the second-half of 2010 before the Labor
Department’s headline nonfarm payroll report shows any meaningful gains.
Over the same time frame labor market data will tend to mute the development
of upward pressure on mortgage interest rates emanating from other
influences.