Troubles In Europe Affect Mortgage Bonds And Home Loans

Photo by Mahdi Ayat
Photo by Mahdi Ayat.

Japan’s earthquake and the war in the Middle East have recently overshadowed problems in Europe. Now, though, it is evident that warnings about the return of European financial and political problems have come true.

Not only government debt in Europe, but also the unity of the European Union entered back into discussions. The stronger and more fiscally conservative EU members like Germany and France don’t want to lend a helping hand to poorly performing countries like Ireland, Greece, Portugal, and many others standing in line behind them.

The consequences of this unease are palpable to everyone: inflation in the United Kingdom rose to the highest level in two years in February, for example. Inflation has a strong negative impact on the bond market, and this news pressured bonds to decline last week.

Increasing prices (up 3.3% in the last three months) are another effect of the problematic situation in Europe. If pricing pressures don’t recede, it is expected that companies will hurt earnings growth by absorbing the higher costs of goods, or that they will pass those costs on to consumers and create consumer inflation. In either case, stocks and bonds, as well as home loan rates, will be adversely affected.

Last week, the Treasury Department announced that it is going to sell some of its massive Mortgage Backed Securities holdings, causing excitement among those looking to purchase or refinance their homes. The announcement pressured traders to try to get their own positions sold, and bond prices decreased as a result. Since home loan rates are tied to Mortgage Backed Securities, this creates the potential for home loan rates to rise in the near future.

Despite the events in the bond market last week, home loan rates remain at very attractive levels. If you’re considering purchasing or refinancing a home, this is a good time to see how you can benefit before rates move higher.

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