Posts Tagged ‘julian hebron’

WeeklyBasis: Is Economy Weak Enough For Rates To Go Even Lower?

August 30th, 2010 by Julian Hebron

Jumpy Rate Market Response To GDP & Home Sales Reports

Rates dropped 0.2% early last week then rose Friday to end the week even. The $109b in Treasury auctions throughout last week caused mortgage bonds to sell off slightly, and July’s record low New Home Sales (down 32.4% year-over-year) and Existing Home Sales (down 25.5% year-over-year) helped mortgages rally— rates rise on bond selloffs and drop on rallies. But then two factors caused a huge 59 basis point selloff Friday:

(1) The second of three 2Q2010 GDP readings showed the economy grew at 1.6% versus expectations of 1.4%. This was a big drop from both the first 2Q reading of 2.4% and the final 1Q reading of 3.7%. Normally economic weakness of this magnitude would cause a mortgage bond rally, bringing rates down. But the opposite happened because traders didn’t think the 1.6% number was weak enough.

(2) St. Louis Fed President and voting FOMC member James Bullard told CNBC that he thinks the Fed has “done as much as we’re going to do” in supporting the mortgage bond market. Remember: the Fed bought $1.25 trillion in mortgage bonds from January 2009 to March 2010, which has been the largest contributor to low rates since credit markets froze in 2007. Mortgage traders take Bullard’s comments seriously because, until now, Kansas City Fed president Thomas Hoenig has been the only FOMC member voting for tighter rate policies.

Rate Factors Week of August 30

Next week is packed with data: July consumer inflation, income and spending Monday; June S&P Case Shiller Home Prices, consumer confidence, and minutes from the August 10 Fed meeting Tuesday; payroll provider ADP’s jobs report Wednesday; June Pending Home Sales from the NAR Thursday; and the critical August BLS jobs report Friday.

After last week’s report that June-to-July Existing Homes Sales were down 27.2%, Robert Shiller (co-creator of the Case Shiller Home Price Index) said “this was the recording the month after the original closing deadline for the [homebuyer] tax credit, so it’s an anomalous month, but I do think that opinions about the market are weakening, and it may result in another decline in home prices going forward.”

Given the weight markets put on his Case Shiller Home Price Index, this Tuesday’s number should move mortgage bonds more than normal. As for Friday’s jobs report, estimates call for 105k job losses in August.

Weaker figures on next week’s data would normally help rates drop. But last week’s mortgage bond market reaction to the GDP figure shouldn’t be ignored: it was a very weak number but not weak enough in the mortgage traders’ eyes, so rates actually rose. Same goes for all data next week.

As discussed in the previous two WeeklyBasis reports, mortgage bonds are overbought, very jumpy, and looking for any little reason to sell off—which would push rates up.

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Posted in About San Francisco, Guest Bloggers, Mortgage Market, by Julian Hebron | No Comments »

WeeklyBasis: Full Tilt Credit Boom, Part 2

August 23rd, 2010 by Julian Hebron

 

Rates are up about .125% following a mortgage bond selloff late last week, but rates are still at unprecedented lows. There was very little economic news last week, and the selloff (which pushes rates higher) came as bond markets traded on two main factors that will continue next week.

Rate Factors Week of August 23

These are all key reports that move bond markets, but they’ll be overshadowed by $109b in new Treasury bond auctions as follows: $7b in reopened 30yr TIPS Monday, $37b in 2yr notes Tuesday, $36b in 5yr notes Wednesday, and $29b in 7yr notes Thursday. This massive Treasury supply will disrupt bond markets and mortgage bonds may sell off, pushing rates higher.

How Long Can Low Rates Last?

Last week I explained (http://ow.ly/2rudZ) how government issues billions in new Treasury debt biweekly, why global markets have had such a big appetite for Treasury and mortgage debt over the past 18 months, and what might happen to rates if this bond rally reversed into a selloff.

A few days after those comments, Wharton finance professor Jeremy Siegel published a Wall Street Journal OpEd entitled The Great American Bond Bubble (http://ow.ly/2ru3P) discussing similar concerns about an overbought Treasury bond market. He thinks a bond market selloff is imminent, and presented estimated investment losses for bondholders.

But you don’t have to be a mortgage or Treasury bondholder to experience investment losses. The rate increase that comes from a bond selloff is, in essence, an investment loss for consumers seeking mortgages.

The fragile global economic climate still justifies investors seeking the safety of mortgage and Treasury bonds, but Siegel is not alone in his sentiment, and markets can shift violently. If the U.S. had a debt crisis like they’re having in Europe, it would cause huge mortgage and Treasury selloffs and sharp rate spikes.

But the more likely scenario is a correction off current price levels for mortgages and Treasuries, and even this would push mortgage rates up .25% to .5%.

For now though, it’s still a full tilt U.S. credit boom, so consumer rates are stunningly low. The rest is whether a homebuyer can negotiate the right deal on a home in an area with price stability.

Which brings us to the second rate factor for next week: bond markets realizing that their boom era can’t go on forever.

First is market calendar for the week beginning Monday, August 23. We have July’s Existing Home Sales (from the NAR) and New Home Sales (from the U.S. Census Bureau) Tuesday and Wednesday, then the second reading of 2Q2010 GDP and Consumer Sentiment on Friday.

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WeeklyBasis: How Bond Markets Affect Mortgage Rates

July 12th, 2010 by Julian Hebron

logo_greenRRATE SNAPSHOT
Conforming, Jumbo, and FHA rates ended last week at record lows again (see rates below), which makes a two-month streak of record lows. A significant rate spike is not expected in the near future, but it’s also not likely rates will stay this low. Here’s why rates could tick up next week.

HOW BOND MARKETS AFFECT MORTGAGE RATES
We will see June Retail Sales figures Wednesday, June business inflation figures Thursday, and June consumer inflation Friday. These reports are important, but will likely show continued tame inflation and tentative consumers, which won’t surprise rate markets.

So the biggest rate factor will be $69b in Treasury auctions as follows: $35b in 3yr notes Monday, $21b in 10yr notes Tuesday, $13b in 30yr bonds Wednesday. The Treasury Department auctions debt to raise money for ongoing government spending, mostly for stimulus plans implemented during the heat of the financial crisis of the past few years.

In the current unstable global investing landscape, Treasury securities are considered a safe, albeit low yielding, bet. Specifically the new issuance of 10yr and 30yr debt competes with 30yr mortgage bonds for investor dollars, and these long-dated mortgage bonds are what most rates are tied to. So if investors sell mortgage bonds to buy Treasuries, mortgage bond prices drop and rates rise.

Also, if the Treasury auctions aren’t well received, it can cause selloffs across all bond markets, including mortgages. Justifiably, the flood of Treasury debt into markets has caused oversupply concerns at different times in the past couple years, and rates rise as all bonds sell off. But while Europe has been in crisis much of this year (especially since early Q2), U.S. mortgage and Treasury securities are in favor.

This is the biggest reason rates are as low as they are.

But market favoritism can change quickly, especially given the run mortgages and Treasuries have already had.

Homebuyers and refinancers are well served to lock existing low rates as soon as they are ready to transact.

DAILY CONSUMER-FRIENDLY COMMENTARY
In addition to this WeeklyBasis report, you can get daily updates in simple terms by visiting www.TheBasisPoint.com. You can follow using Twitter feed at www.twitter.com/thebasispoint and/or you can ‘Like’ www.facebook.com/thebasispoint and headlines will flow into your Facebook stream.

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Mortgage Borrower Alert: As of June 1, Lenders Will Run Your Credit Twice During Loan Process

July 9th, 2010 by Julian Hebron

logo_greenREffective June 1, anyone looking to obtain a home purchase or refinance loan will most likely have their credit run twice during the loan process: once in the beginning pre-approval process like normal, and again prior to loan funding. This process will apply to most loan amounts up to $729,750 because of the recently announced Fannie Mae Loan Quality Initiative (see Undisclosed Liabilities Q&A top of page 3), which includes many new quality control measures lenders must follow when underwriting, approving, and funding loans—but this one is the most important to call out for consumers right now.

Why Run Credit Twice?
The purpose of this guideline is to make sure that borrowers didn’t go out and open up new credit accounts while in process of being approved for their home purchase or refinance loan. Borrowers sometimes don’t tell their lenders about their non-mortgage activities, but going forward you should definitely let your lender know of any other credit card, car loan/lease, student loan, business loan, or any other type of credit application you might be processing while obtaining a home loan; you should also inform your lender of any current or planned credit card or other purchases you intend to make during the home loan processing period—if any new credit activity is revealed by this newly-required prior-to-funding credit report, the loan won’t fund because it will have to be re-underwritten and approved with whatever new debts or new credit accounts might show up on the new report. Read more.

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WeeklyBasis: Rates Can’t Possibly Go Lower, Right?

July 7th, 2010 by Julian Hebron

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RATE SNAPSHOT

Rates have dropped steadily since May 6 and hit two new record lows in each of the last two weeks. Rates for Conforming loans up to $417k, Super Conforming loans $417k-729k by county, FHA loans, and jumbo loans above $729k are below. Also below is a chart showing Conventional (non FHA) 30yr Fixed mortgage rates from 1971 to Present. The all-time record low of 4.58% with .7% in points was set the week ending July 1. The fine print on rates used in the chart is here: 

WHY RATES ARE SO LOW

In an unprecedented rate stimulus exercise from January 2009 through March 31, the Federal Reserve bought $1.25 trillion in mortgage bonds. Rates are tied directly to mortgage bonds, so when those bond prices rise on buying rallies, yields (or rates) drop. Rates were already near all-time lows as of March 31 when the Fed ended its program.

Then a week later on May 6, Greek parliament voted on austerity measures to increase taxes and cut spending (including wage cuts for about 20% of their workforce), and rioting ensued. That caused a brief 1000 point drop in the U.S.’s Dow stock index, and despite recovering from lows that day, stocks (again using the Dow as a benchmark) have lost 1240 points, or 11.35%. European bonds have taken big losses as the debt crisis spread beyond Greece. And here in the U.S., weaker new and existing homes data in the past 2 months, and June’s weak employment report has also caused market participants to question the strength of the economic recovery. 

The end result is heavy buying of Treasury bonds and mortgage bonds since they’re both considered the safest investments relative to other options globally. Mortgage bonds have steadily risen from Fed-induced March 31 highs to staggering new heights, which is why rates are down.

RATE LOCK BIAS CONTINUES

This report has maintained a rate lock bias since mid-May for current homebuyers and for homeowners who have borrower AND property profiles that qualify for refinancing. It seems improbable that current levels of mortgage bonds can hold, and if they break lower, rates will rise. There are no economic reports of particular note for the holiday shortened week beginning Tuesday, July 6. 

DAILY CONSUMER-FRIENDLY COMMENTARY

In addition to this WeeklyBasis report, you can get daily updates in simple terms by visiting

http://bit.ly/9jL8nI. The fine print on the rates in this WeeklyBasis report is at the bottom of the report. www.TheBasisPoint.com. You can follow using Twitter feed at www.twitter.com/thebasispoint and/or you can ‘Like’ www.facebook.com/thebasispoint and headlines will flow into your Facebook stream.

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WeeklyBasis: Primer On Fed Rate Strategy Before June 23 FOMC Meeting

June 21st, 2010 by Julian Hebron

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RATE SNAPSHOT
It’s quite surprising that rate volatility has been minimal for three weeks. As such, zero-point rates on 30yr fixed Conforming loans (up to $729k) held last week near record lows for a third straight week, and one-point rates on Jumbo loans (above $729k) remain steady in the low- to mid-5% range. Rates for each category below.

RATE FACTORS WEEK OF JUNE 21
Volatility could return with a full economic slate next week. Here’s the market moving data for the week, each noted with what impact it could have on rates:

We start with May Existing Home Sales Tuesday (rates neutral), a two-day Federal Open Market Committee meeting ending with a rate policy announcement Wednesday (rates neutral to higher), the third of three 1Q2010 GDP readings Friday (rates neutral to higher), $108b in 2yr, 5yr, and 7yr Treasury Note auctions Tuesday-Thursday (rates higher), and the House/Senate reconciliation of a massive finance reform bill will reach a critical stage as lawmakers look to finalize the bill for President Obama (rates neutral).

WHAT THE FED WILL SAY WEDNESDAY, JUNE 23
The Fed’s FOMC meeting announcement Wednesday will likely reveal the Fed’s intent to keep overnight bank-to-bank Fed Funds Rates at .25% and overnight Fed-to-bank Discount Rates at .75%. They may also confirm whether they’ll raise these overnight rates before they’d start selling the $1.25b in mortgage bonds they bought from January 1, 2009 to March 31, 2010.

And finally, we’ll see if any FOMC members come around to Kansas City Fed President Thomas Hoenig’s way of thinking. At every FOMC meeting this year, he’s voted to start gradually hiking rates to avoid more violent rate hikes later (more on this in next section).

The Fed selling mortgage bonds would directly and immediately cause mortgage rates to rise, while the Fed hiking overnight rates would have an indirect and slower hiking impact on mortgage rates. So when they decide the economy can handle higher rates they will hike overnight rates first. Then as the recovery strengthens, they’d start selling mortgage bonds. When those bond prices drop in a selloff, mortgage rates rise commensurately.

ARE FED RATES TOO LOW FOR TOO LONG?
The debate today is whether Bernanke’s Fed is keeping rates too low for too long. Greenspan’s Fed did the same thing with the Fed Funds Rate from January 201 (6.5%) to June 2004 (1%), and when they did start hiking off the 1% mark, it was gradual until Fed Funds reached 5.25% June 2006. It stayed there until the financial crisis picked up steam, then the Fed cut from 5.25% in September 2007 to .25% December 2008, and it’s been at .25% since then.

Greenspan took lots of heat for leaving rates too low for too long. Bernanke is perhaps better justified since this financial crisis and resulting global economic instability is much deeper than anything Greenspan faced. But we’ve also increased the money supply drastically to combat the crisis, so if the economy does show continued signs of improvement, inflation can spike quickly. Fed rate hikes and mortgage bond selloffs would follow, both causing mortgage and all other rates to spike.

Volatility is the byproduct of markets trading on every little sign that we’re finally ready to move out of an artificially low rate era. And that’s precisely why this WeeklyBasis opened by saying “it’s quite surprising” to see less volatility in recent weeks.

It’s also why consumers waiting for lower rates will be disappointed if they wait much longer.

DAILY CONSUMER-FRIENDLY COMMENTARY
In addition to this WeeklyBasis report, you can get daily updates in simple terms by visiting www.TheBasisPoint.com. You can follow using Twitter feed at www.twitter.com/thebasispoint and/or you can ‘Like’ www.facebook.com/thebasispoint and headlines will flow into your Facebook stream.

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WeeklyBasis: Three New Deal Killers Homebuyers Need To Be Aware Of

June 14th, 2010 by Julian Hebron

Zero-point rates on 30yr fixed Conforming loans (up to $729k) held last week near record lows for a second straight week, and one-point rates on Jumbo loans (above $729k) are steady in the low- to mid-5% range.

RATE LOCK ADVISORY WEEK OF JUNE 14
WeeklyBasis continues its rate lock bias going into next week because European debt problems that caused U.S. rates to drop during May and early-June are easing, and rates could reverse as a result.

This coming market week of June 14-18 is likely neutral for rates. We’ve got business and consumer inflation reports Wednesday and Thursday, and housing starts and building permits Wednesday. The X-factors for rate markets are ongoing global debt fears, and continued Senate and House debate to reconcile their two versions of financial reform bills. Mortgage bonds remain in a slightly overbought state, and if these bonds sell off, rates would rise.

THREE DEAL KILLERS TO BE AWARE OF
Borrowers and their Realtors should be aware of three key topics of recent weeks that can delay or kill deals. In all three cases, you should ask for clear answers from your lender on whether they can fund loans with these characteristics BEFORE going forward on a loan and before writing an offer to buy a home.

(1) TWO CREDIT REPORTS DURING LOAN PROCESS:
As of June 1, Fannie Mae is requiring that lenders who sell loans to them (most lenders do this) run a second credit report on the borrower before the loan funds to make sure the borrower still qualifies for the loan. This means borrowers should severely limit all credit-related spending activity and check with their lender before engaging in any activity. If a pre-funding credit report is different from the credit report run at time of application, loan funding could be delayed or ineligible. Click here for more on this rule and what it means for credit scores: http://bit.ly/bx1pBy.

(2) RESCRICTIONS ON PROPERTY FLIPS:
If any currently listed property was bought in the past three months, most lenders have restrictions on loans made to someone buying that property. Since many properties listed now were bought in recent months at deep discounts by investors with the intent to quickly fix and sell (or “flip”), lenders often question the value of these properties when they come back onto market. Some lenders won’t even lend on a property that’s a flip. And the lenders who do usually require two appraisals to verify the value and quality of the home. Often, loan agents issue loan pre-approval letters to borrowers without pre-approving the borrower’s target property, so make sure your lender checks out your target properties before you write any offers—loans are funded based on approving borrowers AND properties.

(3) FUNDING DELAYS ON FLOOD ZONE PROPERTIES:
If you’re seeking a loan on a property in a FEMA-designated flood zone, FEMA is currently not allowing new flood insurance policies (for homebuyers) or extensions of existing flood insurance policies (for refinancers) until Congress reauthorizes the flood insurance program that expired May 28. Lenders won’t fund a loan on a flood zone property without insurance (and it should also be noted that they won’t fund a loan on any property without basic, non-flood insurance). FEMA has said a Congressional vote to reinstate flood insurance won’t occur until Tuesday, June 15 “at the earliest.” FEMA posts latest on this topic here: http://www.fema.gov/business/nfip/nfip-reauth.shtm. Borrowers with applicable properties need to have this conversation with their lender to determine loan eligibility before entering into a purchase or refinance loan transaction.

DAILY CONSUMER-FRIENDLY COMMENTARY
In addition to this WeeklyBasis report, you can get daily updates in simple terms by visiting www.TheBasisPoint.com. You can follow using Twitter feed at www.twitter.com/thebasispoint and/or you can ‘Like’ www.facebook.com/thebasispoint and headlines will flow into your Facebook stream.

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WeeklyBasis: How Long Record Low Rates Will Last? (CHART)

June 7th, 2010 by Julian Hebron
Rates1971to2010_jdh

Zero-point rates on 30yr fixed Conforming loans (up to $729k) begin the week back at record lows, and one-point rates on Jumbo loans (above $729k) are steady in the low- to mid-5% range. The European debt crisis flared up again last week and Friday’s jobs report was drastically lower than expected. The result was that global investors continued to be net buyers of Treasury and mortgage bonds as a safe haven, and when mortgage bond prices rise on these buying rallies, rates drop.

RECORD LOW RATES TO START WEEK
As of market close Friday mortgage rates were again at their lowest levels since 1971. Attached is a chart showing this.

The WeeklyBasis rate lock bias continues this week—mortgage bond levels make it unlikely rates can drop further, and this is the time for borrowers to lock record low rates.

The latest EU country to buckle under the weight of its own debt is Hungary, as their prime minister issued a statement Friday saying their “economy is in a grave situation” and market speculation about Hungary defaulting on their debt “isn’t an exaggeration.”

Markets indeed speculated by selling (or shorting) the country’s debt securities, and once again investors shifted assets into U.S. Treasury and mortgage bonds—which helps rates.

The other big factor in rates dropping last week was Friday’s poor jobs report. It showed 431k jobs were added to economy versus 500k expected. Far worse was that 411k jobs were temporary workers hired to conduct the U.S. Census, and only 41k private sector jobs were created.

ECONOMIC WEEK AHEAD
This week is light on economic news. The biggest market mover is $70b in Treasury auctions as follows: $36b 3yr Notes Tuesday, $21b 10yr Notes Wednesday, $13b 30yr Bonds Friday.

New Treasury supply, especially the longer dated 10yr and 30yr issues, competes with mortgage bonds for buyers and can also spook bond investors. So these auctions can cause mortgage bonds to sell off and rates to rise if they don’t go well.

There are also 7 senior Fed officials giving speeches on the economy throughout the week, and we have Retail Sales on Friday, a key measure of consumer strength.

Also BP seems to be making progress on the Gulf oil leak and Apple may release a new iPhone this week, both of which could push stocks higher and rates would also move higher if this was the case.

DAILY CONSUMER-FRIENDLY COMMENTARY
In addition to this WeeklyBasis report, you can get daily updates in simple terms by visiting www.TheBasisPoint.com. You can follow using Twitter feed at www.twitter.com/thebasispoint and/or you can ‘Like’ www.facebook.com/thebasispoint and headlines will flow into your Facebook stream.

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WeeklyBasis: Rationale For Rate Lock Advisory

June 2nd, 2010 by Julian Hebron

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Zero-point rates on 30yr fixed Conforming loans (up to $729k) begin this week up about .125% after touching record low levels the week of May 17, and rates on Jumbo loans (above $729k) are steady. Rates are holding just above record lows because global investors continue to be net buyers of Treasury and mortgage bonds as a safe haven from European debt problems and stock weakness. When mortgage bond prices rise on these buying rallies, rates drop.

EUROZONE PROBLEMS LOWER U.S. RATES

Debt concerns in Eurozone countries continue as we enter June, with ratings agency Fitch downgrading Spain from AAA to AA+ on Friday, and France acknowledging that their ratings are justifiably at risk. As for stocks, the Dow and S&P lost 7.9% and 8.2% respectively in May, the worst losses in five quarters.

To calm markets last week, China stated they weren’t shifting away from European bonds, and it worked for a couple days. Stocks rallied and U.S. mortgage and Treasury bonds sold off, pushing rates higher.

But to begin this week, the data is proving that most institutional investors and central banks are net sellers of Eurozone debt (http://bit.ly/c5MKpf).

This will help keep rates low short-term, but it’s unreasonable to expect that rates can go lower.

Before the week of May 17, we only touched on record low rates (which are .125% lower than today’s average rates shown below) two other times since Freddie Mac started keeping the official records in 1971: April 2009 and November 2009. And in both cases, rates rose just as quickly.

The reason is that there are too many factors preventing mortgage bonds (that rates are tied to) from rallying past current price levels—not the least of which is the Fed’s $1.25t mortgage bond portfolio they will look to start selling in the next 12-24 months.

RATE LOCK ADVISORY FOR WEEK OF JUNE 1

Besides these global economic topics influencing markets this week, the high points of the economic calendar are as follows. The WeeklyBasis rate lock bias continues for the second week—this is the right time for borrowers to lock rates at the lowest possible levels.

NAR’s April Pending Home Sales Tuesday, which will show us how many homes went into contract and these numbers will still be skewed by the April 30 expiration of the Federal homebuyer tax credit.

There are five public speeches this week on the economic outlook by voting members of the Fed’s rate setting committee, including Kansas City Fed president Thomas Hoenig who has voted against keeping the overnight Fed Funds Rate at .25% at all three 2010 Fed meetings—he thinks inflation is a threat and his public comments usually cause rates to rise.

The Bureau of Labor Statistics jobs report Friday is expected to show 508k jobs gained in May, which would be a monumental single-month gain since 573k jobs were added from January through April. If this the actual number is close to this, rates will rise on improving economic sentiment—even if the unemployment rate doesn’t move much from it’s 9.9% mark.

DAILY CONSUMER-FRIENDLY COMMENTARY

In addition to this WeeklyBasis report, you can get daily updates in simple terms by visiting www.TheBasisPoint.com. You can follow using Twitter feed at www.twitter.com/thebasispoint and/or you can ‘Like’ www.facebook.com/thebasispoint and headlines will flow into your Facebook stream.

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WeeklyBasis: May 6 ‘Flash Crash’ Incites Two-Week Refi Boom

May 24th, 2010 by Julian Hebron

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Zero-point rates on 30yr fixed Conforming loans (up to $729k) ended last week at their lowest levels since official records began in 1971, and Jumbo 30yr fixed loans (above $729k) touched the low-5% range. By the time last week’s rate levels are officially announced by Freddie Mac on May 27, rates are likely to be higher. Below is a recap of how rates got here and rationale for why rates may rise next week.

WHY RATES & STOCKS HAVE DROPPED
The Dow dropped 1000 points before closing down 348 points on May 6. The press has dubbed it a “Flash Crash,” but let’s go beyond the clever label to understand what happened that day, why the Dow is down 675 points since that day, and why mortgage rates are down .25% since then.

MAY 6 STOCK CRASH
Europe’s troubles started with Greece facing default on it’s bonds due to insufficient tax revenue, so they were granted a $140b bailout package by the IMF and fellow members of the European Union. As a condition of the bailout, they were forced to cut salaries of Greek citizens and raise taxes, measures which Greek parliament voted into law May 6. The vote caused rioting and death on the streets near the Greek parliament in Athens, and it tipped off the so-called Flash Crash here in U.S. stock markets.

MAY 9 TO PRESENT
U.S. and non-U.S. stock markets continued down Friday May 7, on fears that more EU countries were in similar trouble. On Sunday May 9, the EU announced a nearly $1t bailout (similar to the U.S. TARP program) to support the debt of all member countries. But since then, investors have been unconvinced, so they’ve been heavily shorting European stocks and government bonds even if they don’t own the securities. This ‘naked shorting’ was banned by Germany last week to little effect, as the market still finds ways to punish securities it deems overvalued.

RATE IMPACT
As investors have sold out of (or shorted) stocks and European debt, they have purchased safer U.S. Treasury and mortgage bonds, driving prices on both to 2010 highs. When mortgage bond prices rally like this, yields (or rates) drop, and that’s exactly what has brought us to record lows on conforming 30yr fixed rates. We touched these same record lows once in April 2009 and again in November 2009, but these three dips are the lowest rates have gotten since official records began in 1971.

WHY RATES MAY RISE MAY 24-28
Whenever there’s talk of a “stock market crash” or “record low rates,” we can be sure volatility is the central theme. As such, those phrases can quickly change to “rally” or “rate spike.” On top of ongoing Eurozone issues and U.S. regulatory reform, there’s a full slate of economic data contributing to the volatility mix next week. The biggest market movers are highlighted below.

Tuesday is the March S&P Case Shiller existing home price report. Last month’s report showed year-over-year home prices going positive for the first time since December 2006. If this trend continues, rates would likely rise.

Thursday is the second of three Q1 GDP readings that will show us if +3.2% GDP growth holds from the first reading in April. If it does, this will solidify a third consecutive quarter of positive economic growth, fueling positive stock sentiment so bonds would sell off, pushing rates higher.

Tuesday through Friday, bond markets will get $113b in new Treasury auctions—$42b in 2yr notes, $40b in 5yr notes, $31b in 7yr notes—and this will be a big test for whether the Treasury and mortgage safe haven from Europe will continue, or new supply will spook bonds and push rates up.

Friday is the Fed’s favorite inflation measure, the Personal Consumption Expenditures Index, and also April Personal Income and Spending will show us whether consumers, who account for two-thirds of GDP, are gaining strength. Tame inflation and better spending could be a net neutral for rates.

DAILY CONSUMER-FRIENDLY COMMENTARY
In addition to this WeeklyBasis report, you can get daily updates in simple terms by visiting www.TheBasisPoint.com. You can follow using Twitter feed at www.twitter.com/thebasispoint and/or you can ‘Like’ www.facebook.com/thebasispoint and headlines will flow into your Facebook stream.

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