Factors Impacting Rates this Week

By Tim McLaughlin, Sr. Vice President, Weichert Financial Services.

Europe/Greece Debt Issues: The US financial markets are extending its high level of volatility as the euro zone debt crisis remains in focus, with growing uncertainty regarding Greece’s ability to avoid a sovereign default. Treasuries and Mortgage Backed Securities are higher throughout the week (prices up/rates down) amid the euro-area debt uneasiness.

The Fed/China: We saw two drivers on Wednesday have a direct impact on the markets from the Fed. First, pre-market open, there were a series of hawkish comments from Fed President Fisher (Dallas), in addition to a Chinese report signaled accelerated inflation, inciting the Peoples Bank of China to raise reserve requirements by 50bps, all of which provided a pre-market pop to Fixed Income.

And then in the latter half of the day Fed Chairman Ben Bernanke was on the tape commenting on the US debt ceiling, stating it should not be used as a mechanism to force budget cuts: “Failing to raise the debt ceiling in a timely way would be self-defeating if the objective is to chart a course toward a better fiscal situation for our nation,” the Federal Reserve chairman said in some of his strongest words yet on fiscal policy, a subject on which he is normally cautious.

His comments raise the stakes for both sides if they fail to reach a deal to increase the debt limit but are likely to prompt a backlash from Republicans who want spending cuts in return for an increase in the amount the government can borrow.

The market, as of late, appears to have rabbit ears around any talks regarding the debt ceiling, and any comments made by officials in an authoritative role are impacting the markets (positively or negatively) in an exponential fashion.

Takeaways: With all the volatility and uncertainty in the marketplace right now (both at home and abroad), that has translated into a continuum “flight to quality” trade which has driven the Fixed Income sector, and mortgage rates in particular, to their lowest rates of the year. 30 year Fixed Mortgages in the mid 4% range, 15 year Fixed Mortgages in the high 3% range, and attractive hybrid ARM structures in the low 3% range (and the high 2% range with points).