THE BASIS POINT

WeeklyBasis 3/12: Contagion!

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

Mortgage bond (MBS) markets are opening slightly better to start this week so if the rally holds, rates could improve a bit.

I went into last week with an upward rate bias because I expected the jobs situation to look better, which was confirmed.

The BLS reported that the economy added 227k non-farm payrolls in February, plus 61k more jobs were reported for the previous two months: January was revised from 243k to 284k and December was revised from 203k to 223k.

But this was offset as Greece received majority consent from private investors to take huge losses on their existing Greek bond holdings by exchanging current holdings for new ones.

On the surface, news like this would cause mortgage bonds to sell and rates to rise because this was a critical hurdle for Greece to receive bailout funds they need by March 20. But some private investors who didn’t agree to the terms were forced to go along with the plan anyway.

This was deemed a default by the body that makes these decisions (the ISDA), and that triggers about $3b in payouts on default insurance.

This isn’t considered a huge number, but it’s a validation of the credit default swap (default insurance) market that investors use to minimize losses by getting paid if a bond defaults.

End result: even though MBS at first sold and pushed rates up on jobs news, the Greek news caused investors to seek safe-haven trades like MBS, which pushed rates back down to end the week even.

That trade continues today, as markets wake up to the debt contagion in Europe.

Greece was never the big issue (not to mention that bailout 2.0 doesn’t solve their core issue).

Other countries like Portugal, Italy and Spain have much larger issues. Today the worry is about Spain, which lowered its deficit target for this year.

The trick with credit default swaps is that nobody knows the exact exposure. So even if ultimate payouts on Greece’s CDS is considered small, this likely isn’t the case as this same issue spreads throughout Europe.

That’s the mood to start the week, so rates should hold lows.

Then we’ve got lots of U.S. data including a Fed meeting tomorrow.

Here I preview each item, and stay tuned day-to-day (Twitter | Facebook)

Also, don’t forget FHA mortgage insurance is rising April 1 for new FHA loans. Existing FHA borrowers are unaffected.
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