Weekly Viewpoint by Larry Baer: Slowing economic growth in China and the potential of another round of sovereign debt woes in Europe have spurred foreign investors to shift cash into the relative safe-haven of dollar denominated assets like Treasury debt obligations and agency eligible mortgage-back securities. This flight-to-quality buying spree has been the primary driver behind the April rally to fractionally lower mortgage interest rates.
Spain, the euro-zone’s fourth largest economy, is at the heart of fears that the single currency bloc’s sovereign debt crisis could lurch into a much more dangerous phase. After its borrowing costs soared last week the Spanish government will put global investors’ confidence to the test on Thursday with the sale of 2- and 10-year bonds. If the auction is poorly bid or fails to draw enough demand to meet Spain’s borrowing need -- the flow of funds into U.S. dollar denominated credit market assets will almost certainly explode – a condition, should it develop, that will likely be very supportive of steady to fractionally lower mortgage interest rates here in the states.
In my judgment the results of Thursday’s Spanish debt sale will easily trump any of this week’s economic reports in terms of its influence on the trend trajectory of mortgage interest rates.
