Mortgage Rates



Interest rate markets opened weaker today after a little weakness yesterday. Europe continues to drag global markets around, however the slight increase in interest rates yesterday and today is more a technical issue than any significant change in underlying fundamentals. The bellwether 10 yr note, the main driver for mortgage rates, fell to 1.70% last Thursday and Friday, the level it hit last Sept before rates shot up to 2.00% in the next three days. With no fear news out of Europe and increasing talk out of China that it is going to increase spending to improve its growth, traders have no immediate reason to push interest rates lower. China plans to speed up approval of infrastructure projects and allocate construction funding faster to improve growth, the China Securities Journal reported. At the lowest levels in history, interest rates will decline more only as the global situation deteriorates. Betting on Greece leaving the 17 member euro currency has driven billions of global cash to US treasuries. Europe has demonstrated over the last 2+ years that what seems likely today can change quickly. Recall there was a bailout plan in place, investors and central bankers lauded it as the beginning of the end of the crisis in Greece.

Merkel and Hollande, leaders of Germany and France, will meet today. Both have different ideas of what is best to save Greece and the entire EU; Merkel has forced spending cuts although there hasn’t been many, and higher taxes that are driving growth down and unemployment higher. Hollande, the new President of France, was elected on his view that Europe must increase spending and back off from some of what he has called draconian demands on Greece, Ireland and Portugal.
European leaders are scheduled to meet in Brussels tomorrow. Merkel said she won’t shy away from disagreeing with French President Hollande, saying good cooperation “doesn’t exclude differing positions.” France isn’t out to create conflict and will welcome “all the tools, all the proposals” at the meeting, Hollande said. Kissy, Kissy; wonder why Europe is keeping the global markets in turmoil?

At 9:30 ahead of April existing home sales at 10:00, the DJIA opened +6, NASDAQ +5; the 10 yr note at 1.79% +5 bp and MBS 30 yr prices -6/32 (.18 bp). The gain at the opened evaporated in 10 minutes on the key indexes. The steady sell off in the stock market mirrors a pullback underway in retail sales, according to ICSC-Goldman whose same-store sales index, at minus 1.7% in the May 19 week, is down for a fourth week in a row. The year-on-year rate is down seven tenths to plus 3.8%. The report notes little positive effect from favorable weather or from lower gas prices.

Japan’s sovereign-credit rating was lowered by Fitch because of limited progress by the government in tackling the world’s biggest public debt burden. The long-term, local currency grade fell by one step to A+, the fifth highest ranking, with a negative outlook, Fitch said in a statement today. The foreign-currency rating declined two steps to A+. The Organization for Economic Cooperation and Development said today that gross public debt will be 223% of GDP next year, up from a projected 214% in 2012; wherever one turns in the world sovereign debt is increasing at alarming rates; Japan, Europe, the US and the list goes on and on.

April existing home sales were expected to have increased 3.7%, as reports sales were up 3.4% after march was revised from -2.6% to -2.8%. The median sales price at $177,400 up 10.1% yr/yr and the highest since Jan 2006. Based on the sales there is a 6.6 month supply. The lack of inventory is pushing prices up. Treasuries and mortgages lost more ground while the stock market turned up on the report.

At 1:00 this afternoon Treasury auction $35B of 2 yr notes, demand is expected to be decent. If the 2 doesn’t match the outlook of good demand it won’t bode well for tomorrow’s 5 yr note and Thursday’s 7 yr note auctions.