WeeklyBasis 2/12: Greece (and U.S. Rates) On Fire

Rates again ended at record lows last week: 30yr single family home loans to $417k closed at 3.625%. Here are Friday’s rates for all loan tiers.

Rates dropped as U.S. mortgage bonds (MBS) remained a safe haven from global economic uncertainty, and stocks had their first losing week of 2012 as the S&P 500 was down 2.26 to 1342.64, breaking a five-week winning streak.

The Reuters picture above (see all) of a Greek citizen walking by a bank Saturday sums it up: uncertainty will continue as Greek debt negotiations dominate headlines and trading.

GREECE BAILOUT IN PLAIN ENGLISH

Athens burned this weekend as citizens protested an austerity package approved Sunday night (BI, NYT) that includes 22% cuts to minimum wage, immediate layoffs for up to 15,000 state workers, and pension cuts.

These austerity measures are required for Greece to secure 130b euro ($171b) more in EU/IMF bailout funds, part of which will cover 14.5b euro in bond payoffs Greece must pay by March 20.

Bailout funds are also conditioned on Greece finalizing months-long negotiations with private bond investors whereby investors take 50% losses by exchanging outstanding bonds for new ones.

If most private investors don’t agree, it could trigger credit default swaps (CDS) on these bonds. CDS are contracts investors can buy so that if an entity (like Greece) defaults on their bond payments, the buyer must be paid.

If this happened, it could cause liquidity issues for European banks that would have to pay on CDS contracts they sold. But dealers claim that even if CDS payments were required in a Greek default, it wouldn’t cause heavy bank losses.

Still, this situation creates indecision for markets because Greek Finance Minister Evangelos Venizelos said Greece must make a formal debt swap offer to private investors by Friday, February 17 so there’s time to finalize terms and secure bailout funds before the March 20 bond payoffs are due.

IMPACT ON U.S. RATES

Another Europe factor this week: estimates for Europe’s 4Q GDP Wednesday call for -0.4%.

U.S. rates are likely to hold given Eurozone uncertainty, but a further rate drop feels less likely given optimism on U.S. data.

The week’s U.S. data includes retail sales, two key manufacturing reports, consumer and producer inflation, homebuilder confidence, new construction (housing starts), building permits, and corporate earnings continue.

Here I preview each stat in detail for those who want trends.

The 3.5% Fannie Mae MBS coupon-a key benchmark lenders use to price consumer rates-closed last week at 103.42, 11 basis points above its 25-day moving average and 59 basis points above its 50 day moving average.

Rates rise when bond prices fall, and these two averages continue to be strong support that have kept MBS from drifting lower. That’s why rates haven’t spiked.

As for whether MBS rise further and rates drop, it’s also a question mark based on Greek negotiations.

Given current extreme rate lows and the fact that lenders are overloaded with loans right now, lenders are likely to hold rates near current levels even if MBS rise modestly. They’d only lower rates if MBS spike on Greek default or something else.

If this doesn’t happen (plus U.S. data is better), we could see U.S. rates rise short-term as investors shift out of MBS and Treasury safe havens into riskier assets.

BOTTOM LINE: These are the lowest rates in history (CHART).
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Related:
-Stat by Stat: Recap Jan 30-Feb 10, Preview Feb 13-17
-Refi Roadmap: A Locked Rate Isn’t A Closed Loan

  • Carolk

    You are factually incorrect regarding Greek CDS.
    European bank liquidity has been shored up by the LTRO,
    CDS are mark-to-marked and collateralized, any trigger would not cause a liquidity panic, but heighten contagion fears, ie Portugal, Spain and Italy.
    There is absolutely no debate for the definition which that triggers CDS. Refer to ISDA.org for definitions of a soverign or corporate CDS credit event.
    If Greek CDS is triggered, net notional amounts (See DTCC data) shows roughly $3bln outstanding. Net notional is what is on the table if a credit event has been determined. ISDA and ISDA only, the appropriate determinations committee, decides when and if a credit event has occured and if a CDS auction is warranted.
    A default would impinge upon European bank balance sheets, but overall damage is expected to be minimal given the MTM and collateralization.

  • http://www.thebasispoint.com/ The Basis Point

    Thanks for the insight Carol. Appreciate it.

 
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