Mortgage note rates remain at all-time low levels.

New day same story line.  Most analysts believe that Greece will vote in anti-austerity political parties in their June 17th runoff election and that despite rhetoric from European Union officials they will exit the EU.  What is up for debate is what will happen at that point.  How far will the political, legal, and financial impact spread?  The uncertainty around that question is why investors have been seeking “safety” in the US debt markets and why interest rates have achieved all-time low levels.

According to minutes released yesterday from the Fed’s last monetary policy meeting the committee is open to additional monetary stimulus should the US economic recovery falter.  Their comments place additional weight on forthcoming economic releases; especially next months monthly jobs report.

Rates are at all-time low levels.  Will they go lower?  They could if the market sentiment worsens over the EU debt crisis.  Regardless, 5 years from now who will be upset with a 3.75% fixed interest rate (APR: 3.88%)?

Current Outlook: neutral

Greek officials have set the date of June 17thfor the next round of elections.  The polls suggest that political parties that oppose EU sanctioned austerity measures will gain ground increasing the likelihood of an exit from the European Union.  Judging by the amount of money withdrawn from Greek banks on Monday the polls are right.

GREEK VOTERS WILL EFFECTIVELY DECIDE ON THE FUTURE OF GREECE JUNE 17TH

Depositors withdrew €700 million from Greek banks leaving the financial system even more vulnerable.

Here at home US economic data was mostly mixed.  The Commerce Department reported that home construction increased in April.  On a year-over-year basis housing starts are up 30%.  However, the number of housing permits drawn, a sign of future construction, fell by 7% in April.  Later today the minutes from the last Federal Open Market Committee meeting will be released.  We don’t expect any mention of further quantitative easing.

Europe continues to be the main driver for US mortgage rates.  Greater uncertainty & fear should cause mortgage rates to improve and vice versa.  I think locking in is not a bad plan at this point.

Current Outlook: locking bias

Encouraging economic data is being overlooked this morning in favor of the political impasse in Greece.  Leaders from the various political factions there have failed to build a coalition government which means they face a run-off election in June.  For US mortgage rates this means we should remain near all-time low levels because of continued uncertainty and speculation regrading the fate of Greece and the surrounding European Union countries.

Speaking of the EU, it was reported earlier today that on the whole the EU economy was unchanged in the 4th quarter of 2011 from the 3rd quarter.  Many analysts had been expecting a contraction so the results were better than expected.  However, if you digs deeper into the results you’ll find that Germany grew by .5% while Italy, Spain, and Portugal contracted.

SOURCE: WALL STREET JOURNAL

Despite speculation that the US economy has been driven back into recession this morning’s monthly retail sales report for April showed modest growth in consumer spending in the retail sector.  A separate report from the Labor Department showed that prices paid by consumers rose by 2.3% on a year-over-year basis.

All in all the economic data out today was better than many had expected.  However, investors remain primarily focused on Europe which isn’t getting any better any time soon.  I will remain in a neutral position.

Current Outlook: neutral

Can Greece be saved?  For the past couple weeks US interest rates have been driven to all-time low levels as political turmoil has engulfed the ailing country.  The uncertainty surrounding the impact of a Greek disorderly default on the European financial system has encouraged investors to seek “safety” in the form of US-denominated debt securities, including mortgage-backed bonds.

US INTEREST RATES HAVE BEEN DRIVEN TO ALL-TIME LOW LEVELS THANKS TO GLOBAL INVESTORS SEEKING SAFETY

Today though there may be a glimmer of hope.  A small leftist political party has reportedly broke ranks with the Syriza party which has been the main voice of dissension from the European Union.  Should Greece’s political coalition steer back to the austerity measures laid out in previous bailout plans it would likely pressure mortgage rates higher.

Here in the US, weekly jobless claims were reported in line with expectations but the Labor Department reduced the number of claimants previously reported for earlier weeks.  Jobless claims had been increasing over time raising worries about the health of the economic recovery.

The US Treasury is set to auction $16 billion in 30-year bonds later today.  Given that interest rates are at all-time low levels it will be interesting to see how much demand there is for these long-dated securities.  The 10-year Treasury yield is back to 1.90%.  I will switch to a locking bias if the 10yr breaks through this important technical level.

Current Outlook: floating

Rates remain at all-time lows levels as uncertainty continues to swell in Europe.  In Greece, the leftist party leader Alexis Tsipras, who is attempting to build a coalition government, is expected to send a letter to EU leaders renouncing required austerity measures.  As I began writing months ago Greece is going to default on their debt.  Analysts suspect that this would likely result in Greece exiting the European Union and creating all sorts of unpredictable circumstances.

The European financial system would likely survive Greece leaving the Euro-zone but what analysts are concerned about are ripple effects.  Will citizens in Spain & Italy also protest austerity cuts to the point where those countries are forced to default and/ or depart the EU?

Fear over the eventual outcome in Europe is driving global capital into the US via the “flight-to-safety” trade and pushing long-term interest rates to all-time low levels.  Problems of this magnitude don’t get solved over night so it would seem borrowers don’t need to rush into locking.  However, we are in uncharted territory.  Rates have only been this low a handful of times in our history so it is tough to think that rates could get much better.

Current Outlook: floating

The financial markets are squarely focused on Greece and the European debt crisis this morning.  Political turmoil has spread across Greeceas the various political parties scramble to build a coalition government.

IS GREECE HEADED FOR THE EU EXIT SOON?

The uncertainty has pushed the Greek 10yr note to 23.01% and increased the likelihood that they will eventually default on their debt and possibly exist the European Union.

The anxiety over Europe is pushing US stocks lower this morning.  The S&P 500 is down around 1.00% and the Dow Jones Industrial Average is off by about .80%.  What’s bad for stocks is often good for interest rates.

The US Treasury is set to auction $32 billion in 3-year note supply later today.  Demand is expected to be strong so I don’t anticipate mortgage rates to be impacted.

Current Outlook: floating

Elections in France & Greece have shown that citizens in those countries are unhappy about austerity cuts forced on them by European finance officials.  In France, Socialist Party candidate Francois Hollande beat out incumbent Nicolas Sarkozy on a platform which promises to soften spending cuts.

INCOMING FRENCH PRESIDENT FRANCOIS HOLLANDE DEFEATED THE INCUMBENT OVER THE WEEKEND AND DEEPENED WORRIES ABOUT THE EU CRISIS.

Similar election results took place in Greece where incumbent political parties were voted out of power in favor of far-left and far-right candidates.  This follows events in Holland a couple weeks ago when the Prime Minister of that country unexpectedly resigned because he was unable to build a coalition to agree on a budget.

Why are the politics of EU countries significant for US interest rates?

Thus far, solutions to the EU debt crisis have been dependent on EU member countries to accept steep austerity cuts.  The political shake-up has investors concerned that these targets will not be met and the crisis will worsen.

When anxiety over the EU debt crisis deepens it causes investors to seek “safety” in US-denominated debt securities including mortgage-backed bonds (MBS’s).  The additional demand for MBS’s is what causes rates to move lower.

Current Outlook: floating

This morning’s all-important jobs report has come in below expectations which helping mortgage rates remain low but technical trading patterns may prevent them from improving.  Analysts had been expecting around 160,000 new jobs to have been created in April but the actual figure came in at 115,000.  However, the Bureau of Labor Statistics also revised higher the previously released figures for February and March.

As I pointed out earlier in the week technical trading patterns are preventing rates from improving in a significant manner.  On the disappointing jobs data the US 10-year Treasury yield has managed to break below resistance at 1.90%.  If the market can close below this layer of resistance then we may see mortgage rates create new all-time lows.  I will shift to a floating position as long as we’re below this mark.

Current Outlook: floating

After a disappointing jobs report out yesterday the markets are feeling better this morning on a better than expected weekly jobless claims.  The report showed that the number of people filing for unemployment benefits fell to the lowest level in a month.

Tomorrow we’ll get to see another highly anticipated monthly jobs report from the Bureau of Labor Statistics.  Mortgage rates fell back down to all-time low levels following last months report which showed that the number of news jobs created fell sharply.  Currently the markets are expecting around 160,000 new jobs for April.  A number north of that expectation would likely pressure rates higher and vice versa.

I expect the markets to trade sideways until then.  I still don’t see how mortgage rates can improve drastically from these levels so I will remain in a locking position.

Current Outlook: locking bias

Weaker than expected domestic and international economic data is helping mortgage rates to remain near all-time lows this morning but we’re still unable to move lower thanks to technical trading patterns (see yesterday’s ‘rate update’ for further explanation).

Here in the US the first of three significant employment reports out this week showed that hiring slowed last month.  The report from the private payroll company ADP indicated that only 119,000 new jobs were created in the private sector last month.  Analysts had been expecting approximately 175,000.  In a separate report from the Commerce Department both factory orders and durable goods orders contracted in March.

ACCORIDNG TO NEW ECONOMIC DATA NEITHER THE US OR EU FLAG IS FLYING HIGH THIS AM

How does this compare to Europe? Believe it or not we’re doing much better.  Similar data out for the Euro-zone today showed that their unemployment rate rose to 10.9%, the highest rate since 1997.  Furthermore, manufacturing activity shrank sharply as steep austerity cuts continue to take a toll on their economy.

Bad news for the economy is typically good news for mortgage rates but rates are already at all-time low levels and are having trouble improving.

Current Outlook: locking bias