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Tuesday’s bond market has opened down slightly with the stock markets relatively calm during early trading. Stocks are showing minor losses with the Dow down 26 points and the Nasdaq down 3 points. The bond market is currently down only 2/32, but we will likely still see an increase in this morning’s mortgage rates of approximately .250 of a discount point due to weakness late yesterday. There is nothing of importance taking place today that is likely to affect mortgage rates. The only piece of data scheduled was August’s Goods and Services Trade Balance report that would have given us details and size of the U.S. trade deficit. As a result of the government shutdown, it was not posted today. However, it was a low-importance report anyhow and likely would not have had much of an impact on the bond market or mortgage rates. With little progress in Washington last night and this morning, there isn’t much to drive bond trading and mortgage pricing this morning. Some of the largest international holders of U.S. debt such as China and Japan are reportedly growing impatient with the situation and becoming more vocal about it. If those reports are accurate, I doubt it will help bring the two sides closer to a compromise, but could lead to instability in overseas markets and trading of U.S. treasury debt. We will probably hear more of this as we get closer and closer to the October 17th deadline that the U.S. has to raise our spending limit to pay our bills. Failing to do so risks a default on our debt (unable to make interest payments) and significantly raises the possibility of a credit downgrade of that debt. That would be extremely bad news for holders of current securities and would push interest rates higher for new debt the government needs to sell to finance operations. We could also expect to see a significant spike in bond yields and mortgage rates. I suspect a temporary patch or short-term spending increase is the most likely play as it would be somewhat beneficial to both sides of the stalemate without caving into the other’s demands on key issues. It would allow more time for a permanent resolution without the catastrophic financial effects of a default. That’s just my opinion, but I would like to believe that everyone involved in Washington is well aware of the long-term negative impact on our economy and global economic and financial conditions if they let the worst case scenario transpire. We still have some time, although that date is quickly approaching. The government shutdown shouldn’t prevent two events from taking place at 2:00 PM ET tomorrow. The minutes from the most recent FOMC meeting will be posted tomorrow afternoon. These may be a major mover of the markets or could be a non-factor, depending on what they say. However, with little else being posted this week they will likely be more influential than usual. The keys will be concerns over the economy, inflation and the Fed's next monetary policy move. If Fed members were concerned about the economy continuing to grow, we may see the bond market move higher and mortgage rates lower during afternoon trading tomorrow. It will be interesting to see how much debate and disagreement amongst members took place during the meeting, particularly about tapering QE3. Also tomorrow is the first of two important Treasury auctions this week. The sale of 10-year Notes will be held tomorrow while 30-year Bonds will be sold Thursday. We often see some weakness in bonds ahead of the sales as the firms participating prepare for them. However, as long as the auctions are met with decent demand from investors, the firms usually buy them back. This tends to help recover any presale losses. But, if the sales are met with a lackluster interest from investors- particularly international buyers, the bond market may move lower after the results are posted and mortgage rates may move higher. It is difficult to believe that there will be a strong demand for these securities with the current state of affairs in Washington D.C. Those results will be announced at 1:00 PM each sale day, but I am not going into the sales very optimistic at all. If I were considering financing/refinancing a home, I would.... Lock if my closing was taking place within 7 days... Lock if my closing was taking place between 8 and 20 days... Float if my closing was taking place between 21 and 60 days... Float if my closing was taking place over 60 days from now...       Alan Russell 161 South San Antonio Rd. | Los Altos, CA 95022 Ph: 650-947-2296 | Fax: 408-335-1118 alanrussell@princetoncap.com CLICK HERE TO STOP RECEIVING OUR REPORT