THE BASIS POINT

WeeklyBasis 1/22: Rate Volatility Ahead

Rates rose .125% above record lows last week: 30yr single family home loans to $417k closed at 3.875%. Here are Friday’s rates for all loan tiers.

Rates rose as bonds sold and stocks rallied on better U.S. housing and jobs data, mixed earnings, and optimism about Greece getting investors in their bonds to agree on losses.

The months-long talks have centered around a target 50% loss for investors. It could be higher and if so, could lead to a situation where defaults trigger a liquidity crisis for European banks. This would cause stocks to sell and a rally in U.S. mortgage and Treasury bonds, pushing our rates down.

There’s also a U.S. Fed meeting and press conference Wednesday where it’s likely the Fed will hold to current policy. Some expect a more explicit signal of QE3, which is when the Fed prints money to buy bonds and lower rates.

I don’t think it happens this meeting, and if not, both U.S. stocks and bonds could sell off a bit, pushing rates up.

Adding to volatility will be 4Q GDP, 3 key housing reports, and earnings from 119 S&P 500 companies.

Here I preview each item for those who want more details.

Looking at stocks, the S&P 500 closed last week at at 1315, up 2% on the week and well above its 200-day and 50-day moving averages of 1257 and 1249. Given that the Fed may well disappoint on QE3 and a possible impasse or worse on Greek debt, it’s probable that the S&P 500 could drop as much as 5% to it’s 50-day average. But it could be offset by better earnings and U.S. data.

Looking at mortgage bonds (MBS), the 3.5% Fannie Mae coupon—a key benchmark lenders use to price consumer rates—dropped 54 basis points last week to close at 102.66.

Rates rise when bond prices drop, and we’re lucky rates only rose .125% because normally an MBS move this big would cause lenders to adjust rates more.

MBS are now resting just 3 basis points above 25-day moving average and 35 basis points above their 50-day moving average. Those averages have provided strong support in recent months, and will be tested this week by Fed and European issues noted above.

MBS and rates will hold or improve slightly if the Greek debt deal goes sideways. But if it’s reasonably clean—meaning there’s no event that triggers claims on credit default swaps and squeezes banks—then we could see U.S. rates rise short-term as investors shift out of MBS and Treasury safe havens into riskier assets.

If you’re a consumer rate shopper and can’t stomach the volatility, remember this:

Rates are still a hair above the record low line, and only a massive meltdown in Europe will cause U.S. rates to go lower near-term. Holding for better in the next 1-2 weeks is rather feeble.
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Further Reference:
Details of Key Data & Events Jan 23-27

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