Supply vs Demand Keeps Rates Low
With investors clamoring for Treasuries and Agency insured mortgage backed securities, rates dropped again over the course of last week, despite fairly neutral economic data. The European debt crisis is the primary driver of this additional demand, as investors have sought shelter in U.S. debt, which they view to be a much safer investment. Although demand increased significantly, supply of new mortgage applications has only been increasing modestly. This supply / demand imbalance has led rates lower.
In the U.S. this week, S&P/Case-Shiller just released their index of housing prices for 20 cities around the country, showing home prices as the lowest in 8 years. Many conclude the large inventory of pending foreclosures has been keeping prices low. Along with consumer confidence levels reported hitting a 6 month low, rates have improved slightly yet again to start the week. This rate improvement occurred in spite of the improved economic outlook in Europe as speculation rose that more aid would be pledged to Greece.
Numerous economic indicators will be released in the week ahead, as prior month reports begin to hit the headlines. Keep an eye on payroll and labor market information, with ADP and Non-Farm Payroll reports announced tomorrow and Friday respectively. Both are projecting growth, but at a slightly slower pace than April. International economic stability will probably be the other primary driver of rates this week. If investors begin to feel more comfortable with the steps being taken to avoid a worsening debt crisis in Europe, you could see money start to flow out of Treasuries and back into equities, which could rates to inch upward. Indicators on manufacturing, factory orders, unemployment, and construction spending are among some of the other reports being released later this week.