Italian Uncertainty Helps Mortgage Rates
The biggest influence on mortgage rates this week came from the Italian election, which reignited investor concerns about Europe and prompted a flight to safer assets. Fed Chief Bernanke continued to show strong support for the Fed’s bond buying program, which was also positive for mortgage rates. As a result, mortgage rates ended the week lower.
Monday’s election in Italy showed very close results between the top three candidates, and it will be very difficult to establish a coalition government when no party has a majority. A long period of negotiations will take place, and another election may be required. What is clear is that there is widespread opposition in Italy to the austerity measures supported by the European Union (EU). Investors are concerned that the third largest economy in the EU will scale back reform measures, which could increase the risk that Italy will default on its debt or leave the EU. Investors shifted to safer assets, including US mortgage-backed securities (MBS), which helped mortgage rates improve.
Topping the US economic news this week was the implementation of mandated across the board government spending cuts on March 1 at midnight. Government spending will be reduced by $85 billion over the next seven months unless action is taken. While the cuts will slow economic growth to some degree, this represents just 2% of government spending, and the reaction in financial markets has been minamal. Investors are looking ahead to the more significant March 27 deadline. Last year, Congress passed a “stop-gap” continuing resolution to fund the federal government through March 27. New legislation must be passed before then to avert a government shutdown.