THE BASIS POINT

WeeklyBasis 3/24: No Etch A Sketch Restart On Euro Debt

Rates ended last week up .125%: 30yr single family home loans to $417k closed at 4.0%. Here are Friday’s rates for all loan tiers.

Not bad considering the week started with rates up .25% as mortgage bonds (aka mortgage backed securities or MBS) sold heavily on news of Apple’s first dividend in 17 years, steady (but still low) homebuilder confidence, and optimism that credit default swap payouts on Greek bonds would be less than predicted.

But as the week went on, rates improved as MBS rallied back.

The Fannie Mae 30yr 3.5% coupon lenders use as a benchmark to price consumer rates ended the week 63 basis points higher than Tuesday’s lowest close of the week.

Rates drop when bond prices rise like this.

The MBS rally and rate improvement was partly due to slightly weaker housing data:

February existing home sales of 4.59m annualized were down 0.9% and broke a 3mo up-streak. And February new home sales of 313k annualized were down 1.6%, which was the second month of declines, and sales have fallen nearly 7% since December.

The MBS (and Treasury) rally is also due to an underlying theme I discussed two weeks ago.

The electorate may quickly forget the policy positions of presidential candidates (here’s a Romney advisor’s now-famous Etch A Sketch ‘restart’ gaffe), but market participants haven’t forgotten about debt contagion in Europe.

Greece was never the big issue and maybe not even Portugal. But bigger debtor nations like Italy and Spain could still rattle global markets medium-term.

Scroll to the Europe Short of Magic Wands section of analyst John Mauldin’s latest for why.

As for next week, I don’t see these issues playing out into some big MBS rally driving rates down sharply. But they’re in the background and temper selloffs to keep rates from rising further than the .25% spike we’ve had in the past two weeks.

I’ve got a rate neutral bias going into next week because now that rates have risen off lows, technicals suggest a rather tight trading range until some catalyst comes along.

Economic data on tap isn’t likely to be that catalyst:

Pending Home Sales Monday, Case Shiller Home Prices Tuesday, final 4Q2011 GDP Thursday, consumer income/spending Friday, and I preview each item here.

What could be rate catalysts are seven speeches by Fed officials next week, including Ben Bernanke on the economy early Monday.

Bernanke will be parsed word by word for signals about more Fed MBS buying (aka QE3). If a signal is there, rates would drop as MBS rally. If he indicates more MBS buying is unlikely, rates would rise as MBS sell.

Also there’s $99b in Treasury auctions as follows: $35b 2yr Notes Tuesday, $35b 5yr Notes Wednesday, $29b 7yr Notes Thursday. Demand for these new offerings impacts MBS markets. Strong Treasury demand would help rates and vice versa.

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