A stronger than expected Employment report on March 6 pushed mortgage rates up to the highest level of 2015. Since then, however, nearly all of the news, both globally and in the US, has been favorable for mortgage rates. In Europe, the European Central Bank (ECB) began its sovereign bond purchase program on March 9. The added demand from the ECB has helped push bond yields lower around the world. In addition, Greek and eurozone officials have made little progress in agreeing to terms for the Greek aid package. This caused investors to shift to safer assets, including US mortgage-backed securities. In the US, the major economic data released since the Employment report has been weaker than expected. Retail Sales, Industrial Production, and Housing Starts all have fallen well short of the consensus. Since slower growth reduces expectations for future inflation, this economic data has been good for mortgage rates. Finally, the largest improvement in mortgage rates took place on Wednesday after the release of the Fed statement. Fed officials downgraded their outlook for the economy and inflation, causing investors to push back their expectations for the timing of federal funds rate hikes.
Economic troubles in Europe have helped mortgage rates move lower in recent months. One reason is that slower global economic growth reduces the risk of inflation, and inflation is negative for mortgage rates. The second reason is that investors have been concerned that the debt problems in Europe could spread to other countries and hurt the global banking system. As a result of the uncertainty, investors have shifted some funds to relatively safer assets, including US mortgage-backed securities (MBS). Greece has experienced the worst of the European debt troubles. After weeks of negotiations, on Monday European officials finally agreed to provide a $172 billion bailout package to Greece. This aid will allow Greece to avoid defaulting on debt maturing on March 20, removing some uncertainty from the market. As it became clearer last week that a deal was close, investors began to reverse the flight to safety trade, selling MBS, and mortgage rates moved a little higher. Investors will continue to watch the situation in Europe. It is not at all certain that Greece will fully implement the severe austerity measures required in the deal, and other countries such as Portugal are teetering on the same economic edge as Greece. [...]
Greece has experienced the worst debt troubles of any European nation, and its debt burden is clearly unsustainable. European officials and bondholders both want to avoid a default, so they have been negotiating a "voluntary" agreement to reduce Greece's debt burden by 50%. As usual, though, the sticking point for the two sides is price. In the case of bonds, this means the yield on the new bonds. Bondholders want the highest possible yield. A higher yield means higher debt payments, however, and Greece will require financial aid from the IMF and other European Union countries to make the payments. A default would trigger many costs and raise the level of uncertainty for investors, possibly raising yields for other European countries, which gives bondholders some leverage. On the other hand, if the Greek government defaults, there is little reason to give bondholders anything. The lack of progress has caused a flight to safety, which has helped relatively safer investments, including US mortgage-backed securities (MBS). Mortgage rates are largely determined by MBS prices, and a "messy" deal or a default would likely cause US mortgage rates to move lower. If bondholders agree to a deal at a yield which Greece can [...]
The economic troubles of Greece have been in the news frequently in recent weeks. Its ability to recover from significant budget deficits and to pay its debts has been questioned and the government debt of Greece has been downgraded. The economy of Greece is tiny, however. The problem is that investors are concerned that other smaller European countries will reveal similar problems. Financial institutions and other private investors have become very reluctant to buy the government debt of these countries, requiring very high yields to do so. The fear is that as the problem grows, banks will become increasingly selective about lending worldwide, as they did during the subprime mortgage crisis. The clear solution is for the Greek government to cut spending, but this takes time and is politically unpopular to accomplish, while the reduced access to credit markets has already taken place. Last week, the European Union (EU) and the International Monetary Fund (IMF) agreed on a $146 billion economic aid package for Greece to allow enough time for the country to stabilize. Still, Greek workers responded to proposed austerity measures with strikes and protests. Financial markets in Europe continued to fall as investors were skeptical that the bailout [...]