Tuesday, April 27, 2010
Congratulations to those who voted for option 3 in Friday's poll. This choice (Greece receives bailout, other EMU member(s) receive bailout, euro remains intact), which won the plurality of votes, is now looking ever more likely. Sentiment towards Portugal, for example, has deteriorated very sharply indeed- 2y yields have more than doubled so far this month. That the Belgian government has collapsed isn't exactly a ringing endorsement of European stability, either.
The contrast between peripheral Europe and another supposed locus of distress, the US mortgage market, could not be greater. Remember when the big fear was that the end of QE would cause the mortgage market to tank? Seems like a lot longer than 4 weeks ago, doesn't it? While it's true that the spread between 30y mortgage rates and 30y Treasuries has widened a smidge, it's still way, way below the prevailing levels during most of the Fed's QE program.
Moreover, 5 year ARM rates are just about the best they've ever been. A quick glance suggested that in the UK, for example, the equivalent product (marketed as a '5 year fixed rate', rather than as a floater, as in the US) is offered at interest rates roughly 100 bps higher.
Despite this of course, the US housing market remains tepid at best. Were mortgage rates ever to "normalize", the housing market would be in very deep doo-doo indeed. And so Macro Man will be watching tomorrow's FOMC statement with great interest. The current language is probably nearing its sell-by date, if for no other reason than greater flexibility is desirable. Yet anything that rocks the boat too hard could possibly send mortgage rates careening back up....and at this point, that's the last thing that the the FOMC or the US economy want right now.