The risk of a US Government default increased yesterday, as weekend talks between the President and Congress failed to produce any tangible results. This finally translated into changes in mortgage and Treasury pricing, with the 10-year note increasing .04% in yield and mortgages roughly 30 basis points less valuable. With little other news to move them markets started down, an ended there.
Mortgage pricing deteriorated yesterday on two principal stories: Europe’s agreement to bail out the essentially bankrupt Greek state, and the failure of the US government to arrive at any sort of agreement concerning deficit reduction and an increase to the debt ceiling. Yesterday’s economic news was mostly neutral, with the leading economic indicators in-line with expectations showing a slight improvement in conditions, and the Philadelphia Fed index slightly above expectations and also suggesting economic growth is in store.
Mortgage pricing wavered throughout the day yesterday, moving with the ebb and flow of rumor and debate on the debt ceiling. With only 13 days before the apocalypse, progress has been spotty, at best. If a solution isn’t found by midnight, will the cost of US debt pumpkin into the double digits as Greek borrowing costs have? Only time will tell, but the consensus is that a default would be catastrophic. Ultimately, rates closed marginally higher than on the prior day.
Fixed-income markets started weak yesterday on persistent doubts regarding whether the government will arrive at a deal to prevent a default on the US national debt in August. Positive economic news from home builders, who boosted housing construction starts by 14% from May to June, also helped, resulting in stock markets opening as much as 1% higher. At 1:30, President Obama made a statement indicating his opinion that congress appears to be moving in the right direction on deficit reduction and debt ceiling increase package. A group of 6 Senators across both parties is gaining momentum with a plan that closely mirrors the President’s own $4 trillion deficit reduction package announced over a week ago.
Mortgage pricing deteriorated late yesterday afternoon as an outright selloff on stock markets rebounded in late trading. With nowhere else for money to come from, bond and mortgage markets were hit hard as positions were liquidated to buy stocks out of their lows. Elsewhere, banking stocks were hit pretty hard, as contagion fears in Europe hammered German and Scottish banks, while additional required loss reserves pressured US banks.
The European bank stress test results were published Friday, and 8 of the 90 banks reviewed failed the tests, with an additional 16 too close for comfort. More of the banks that failed are in Spain than anywhere else, 5 in total. The results were somewhat mixed, but ultimately had a mild effect on mortgage pricing. While MBS demand had been very weak in early trading on the higher-than-expected inflation rate suggested by the CPI, but later reversed on weak manufacturing numbers from the Empire Fed and Consumer Sentiment. In the end, pricing closed marginally better than it had on Thursday.
ortgage pricing retreated yesterday on several positive economic reports, and on Fed Chariman Bernanke’s second day of testimony before Congress. On Wednesday, the Chairman had suggested that the Fed would be willing to consider additional steps to support economic growth and, especially, job gains. In Thursday’s testimony, he reiterated that willingness, but he also made it very clear that he doesn’t perceive that the current situation justifies that step at this time. Economic reports added to this, showing an increase in core inflation and retail sales and a modest decline in unemployment claims.
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 3rd 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.
Yesterday’s strong start accelerated through the day the day as traders took concerns about the expansion of Europe’s debt worries to Italy very seriously. The 10-year Treasury note, which had ballooned to over 3.10% as problems in Greece appeared to have subsided, dipped below 3.0% again on concerns that the situation may actually worsen. Now worries about Italian and Spanish debt, previously believed the most secure of that group of 5 weak European economies, are spreading and that pushed a lot of money out of stocks and into the safety of US Treasuries yesterday.