How the European Agreement affects the mortgage market.

Compliments of David Kuebler from SWBC Mortage in Killeen.

To the relief of investors, European leaders reached agreement to provide aid to countries with debt troubles. Investors reversed the flight to safety trade, pushing mortgage rates higher. The economic data released during the week was positive for mortgage rates, however, and Fed officials hinted that the Fed could purchase additional MBS to stimulate the economy. The effect of these opposing influences was a high degree of volatility, but mortgage rates ended the week with only a small increase.

On Thursday, European leaders announced a comprehensive aid package, and the scope of the plan was large enough to reduce the concerns of most investors. The European plan included three primary elements. First, private banks holding Greek bonds agreed to a “voluntary” haircut of 50%. Second, the EFSF bailout fund will be increased to 1 trillion euros (about $1.4 trillion). Finally, 106 billion euros will be used to recapitalize European banks. After the news, global stock markets posted large rallies.

Following the European announcement, investors will focus more attention on the economic data. The current economic environment, with slow economic growth and tame inflation, supports low mortgage rates. Third quarter GDP increased at a 2.5% annual rate, which was faster than the first half of the year, but still below average. The September Core PCE price index, an inflation indicator closely watched by the Fed, was a moderate 1.6% higher than one year ago. Any signs of faster economic growth or rising inflation could push mortgage rates higher, however.

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