Jun 092015

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By G. Steven Bray

Mortgage rates shot up last week to their highest levels of the year. While Fri’s jobs report showed healthy job creation in May, I think it’s the undercurrent from the European bond market that’s driving rates higher. German 10y bond rates have increased from near-zero to almost 1% in a couple short months, and they’re dragging US rates along for the ride. Unless and until investors stop the bond selling stampede, the market is going to be biased towards higher rates.

There are 2 other things to keep in mind:

– Recent US economic data has been fairly positive, especially wage growth, which finally has a pulse. It is increasingly likely the Federal Reserve will raise short-term interest rates at its Sep meeting, and that will inject more volatility into markets.

– In Europe, the chances of a Greek default are increasing. Greece needs an extension of its bailout, but the European Union wants it to reform its economy. Reports are that recent Greek reform proposals are rehashed junk the EU already has rejected. That said, I’m still betting the EU finds a way for Greece to save face. But if Greece defaults, that could be the ripple to pause this move towards higher rates.

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