WeeklyBasis 5/8/10: How Lenders Create Rate Sheets, European Debt To Drive Markets Next Week

How Lenders Create Rate Sheets
Zero-point rates on loans up to $729k held at record lows for the second week last week even though mortgage bond levels might suggest rates would have dropped further. Jumbos also held steady at very attractive levels. Mortgage bonds benefitted as the EU/IMF’s $140b Greece bailout caused investors to sell European debt and buy more conservative U.S. mortgage and Treasury bonds. When bond prices rise on these buying rallies, rates drop.

But it’s not actual mortgage rates that drop when mortgage bond prices rally, it’s mortgage bond yields (the rate of return on those bonds) that drop. Then lenders re-price mortgage rate sheets based on those lower yields. This lowering of mortgage rates didn’t happen to quite the extent that lower mortgage bond yields might suggest because last week was wildly volatile. Mortgage bond prices swung more than 100 basis points Thursday and Friday—in the bond world, this is similar to the massive swings we saw in the Dow Thursday (when it was down 1000 at one point).

And when lenders see this kind of volatility, they sometimes hold the line on rate sheet re-pricing. This is what lenders did Thursday and Friday so they can wait to see if the mortgage bond rally can sustain itself or if it washes out. Nevertheless, current low rates still speak for themselves.

European Debt Issues To Drive Markets May 10-14
Next week is light on economic data with Trade Balance Wednesday, Retail Sales Friday, and Consumer Sentiment Friday being the three biggest reports. We also have 7 public speeches by senior Fed officials throughout the week.

Market movement next week will continue to be dominated by the European debt situation. To keep the Greece debt crisis from spreading throughout the 16-country Euro zone, the EU announced today that they will “defend the Euro, whatever it takes” by creating a fund. By Sunday, before Asian markets open, the EU will roll out further details of their plan.

And since government debt issues are front and center, next week’s Treasury auctions will strongly influence the direction of trading—and rate levels. Treasury will auction $78b in new debt as follows: $38b 3yr notes Tuesday, $24b 10yr notes Wednesday, $16b 30yr bonds Thursday. Logic would suggest strong uptake on these auctions since this debt is a better credit risk than other government debt options, but as we saw Thursday and Friday, logic can be fleeting.

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CONFORMING RATES ($200,000 – $417,000) – 0 POINT
30 Year: 4.875% (4.99% APR)
FHA 30 Year: 4.875% (4.99% APR)
5/1 ARM: 3.25% (3.37% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 0 POINT
30 Year: 5.25% (5.37% APR)
FHA 30 Year: 5.125% (5.26% APR)
5/1 ARM: 4.25% (4.37% APR)

JUMBO RATES ($729,751 – $2,00,000) – 1 POINT
30 Year: 5.5% (5.62% APR)
5/1 ARM: 4.625% (4.74% APR)