European Elections Favor Challengers
Last week saw increasing uncertainty in Europe, leading to lower stock prices and strong demand for the US Treasury auctions. Ordinarily, these factors would result in improved mortgage rates, but mortgage rates ended the week nearly unchanged from the previous week.
In closely watched elections on Sunday, voters in France and Greece strongly favored the candidates who opposed austerity measures. The results confirmed that political opposition to austerity is strong in many countries, and there is growing disagreement about the best approach to solve Europe's problems. In Greece, the government struggled to reach a consensus, leaving in question the future of required austerity measures. EU officials threatened to withhold their next aid payment, and the possibility that Greece could leave the European Union has increased.
The high level of uncertainty in Europe caused investors to worry about the pace of global economic growth. During the week, investors moved away from risky assets in general, sending US stock markets lower. US bond markets are normally a beneficiary of such a flight to safety, but neither Treasuries nor mortgage-backed securities (MBS) posted gains this week. With rates near record lows, investors appeared to be reluctant to purchase bonds at lower yields.
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