Irish Eyes Are NOT Smilin’

Irish Eyes Are NOT Smilin’ – 7/13/11

The smorgasbord of European debt problems served up another heaping plateful yesterday, as debt rating agency Moody’s downgraded Irish bonds to junk status, making it the 3^rd country to see its obligations compared to bathroom tissue. Combine that with sentiment from several members of the Federal Reserve Open Markets Committee that they would be willing to entertain the possibility of more stimulus if economic weakness continues, and the environment was right for mortgage pricing to improve significantly yesterday. It didn’t, but only because it had already improved so much in prior days. Still, this does shift the bias towards possible further improvement.

European markets are a bit stronger this morning after Italy announced plans to toughen its austerity measures in the interest of stabilizing its debt values. If you think that some of the volatility we’ve seen in recent years is significant, with regards to its impact on mortgage rates, ponder this: on Tuesday, you could have bought Italian 10-year debt yielding over 6%; with today’s announcement, that yield dipped to 5.45%. That .55% swing in yields, in mortgage terms, would be the equivalent of 2.25 points in price! While we are suffering through some price instability at the moment, be thankful that we’re not writing mortgages in any of the debt-impacted countries of Europe at the moment.

Today, there are a few significant economic events. The first was the announcement of import price changes, which showed a modest decline in prices, as falling petroleum prices brought relief at the gas pump. Prices declined by 0.5% in June, but this was actually a smaller decline than had been anticipated. Export prices, on the other hand, rose. This report isn’t all that impactful to rates and will likely be ignored, but it is interesting enough to review.

At 10:00 this morning, Chairman Bernanke will find himself in a very hot seat in front of the House Financial Services Committee. Expect to see all manner of questions regarding why the economy isn’t creating jobs. I anticipate that this will likely cause some improvement in pricing, simply because I can’t imagine anything Bernanke might say that would reassure Congress we’ll get through this without some further government activity. This will likely be reflected in the results of the influential 10-year note auction which will be released at 1:00 PM.

I’m expecting some volatility today, but there’s nothing happening that suggests a meaningful worsening in pricing. I feel we are safe to float for the moment, not just because of the issues that have been coming out of the woodwork the past few days, but also because the rest of the data this week relates to inflation, and there have been few indicators whatsoever of inflation recently. The next big specter is the US debt ceiling debate, which appears to be running around in circles at the moment. At the moment, it appears that government has little capacity to fix anything, and that opens a significant risk they might actually break something, instead.

Lock recommendations, based on time to loan funding:

<15 days: consider locking

15-30 days: float

30+ days: float

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