Once again, the primary influence on mortgage rates was the uncertainty in Europe. Mixed economic data released this week was roughly neutral. Investors seeking relatively safer assets pushed stocks lower and mortgage rates to record low levels.

In Europe, the focus was primarily on Greece this week. Greek political leaders remained very divided and were unable to form a coalition government following last week’s elections. There is little support for the bailout package, which requires severe austerity measures, and it’s not clear what position a new government will take. Statements from EU officials suggest that Greece must comply with its austerity agreement to receive further aid. Without aid, Greece likely will be forced to leave the European Union (EU). As a result, Fitch again downgraded the debt of Greece.

The turmoil in Europe has been positive for US mortgage rates for two main reasons. First, economic growth in the region has slowed, which reduces future inflationary pressures. In addition, investors have responded to the uncertainty by shifting to relatively safer assets, including US mortgage-backed securities (MBS). The economy of Greece is very small, but the increasing possibility that Greece will exit the EU calls into question the stability and the benefits of the monetary union, causing a wide range of problems outside of Greece. Bond yields in other troubled European countries have risen, creating a further drag on economic growth. People are beginning to withdraw their money from banks in these countries, increasing the risk of bank failures. Europe’s issues will not be resolved quickly and will continue to influence US markets for quite a while.

Next week, Existing Home Sales will be released on Tuesday. New Home Sales will come out on Wednesday. Durable Orders, an important indicator of economic activity, will be released on Thursday. Consumer Sentiment will round out the schedule on Friday. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. There will be a G8 meeting over the weekend. If the meeting results in an unexpected coordinated policy action to support Europe, it would impact US markets as well. Mortgage markets will close early on Friday in observance of Memorial Day.

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