The Day Ahead: Existing Home Sales & Vote of Confidence

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Rates rose yesterday in a quiet trading environment largely thanks to gains in the stock market.  The S&P closed +0.54% at 1278.36. The 10yr note finished 7/32 lower in price at 101-16 and 2.3bps higher in yield at 2.949%. This pulled production MBS prices lower. The Fannie Mae 4.0 MBS coupon went out -3/32 at 100-22.

In the absence of new economic data, stocks drove directionality in the bond market yesterday and they're doing it again this morning.  S&P futures are 0.53% higher at 1280.50 and benchmark 10yr Treasuries are down 6/32 at 101-08 yielding 2.978% (+2.2bps).  As a result, "rate sheet influential" MBS coupons are -1/32 at 100-18.

Positive feelings on the Greek debt crisis are giving stocks some bounce while benchmark Treasuries remain bid below 3.00% support. 

Quick Catch-Up on Greece...

Greek officials have said the country will face default by mid-July if the European Union and the International Monetary Fund do not release the next phase of bailout funds by then.  Over the weekend Euro-zone finance ministers delayed a final decision on extending those emergency loan funds to Greece until they agree on an aggressive plan to pay back their debt (austerity measures). EU leadership issued this statement on Monday morning,  "The assessment showed that debt sustainability hinges critically on Greece sticking to the agreed fiscal consolidation path, the plans of collecting EUR 50 billion in privatisation proceeds until 2015, and the structural reform agenda which will promote medium-term growth."

Since restructuring government leadership positions largely failed to improve national sentiment surrounding tough spending cut decisions, Greek Prime Minister George Papandreou is now seeking government approval to enact his own austerity plan through a "vote of confidence", which will be taken on Tuesday night around midnight in Greece (5pm eastern).

Investors believe this vote will pave the way for Greece to receive the next installment of its emergency bailout payments. Prospects for this vote to pass Greek Parliament seem to be strong at the moment as equities are green around the globe, but failing to agree on deep spending cuts would be a signal that the Greeks are not serious about making long-term concessions to pay back their debt, which could lead to sharp declines in global equity markets and a flight to safety in U.S. government bonds.

Other Events on the Calendar...

10:00 - The pace of Existing Home Sales is set to decline in May after an unexpected 0.8% drop in April, which left the pace at its lowest since February. This decline is expected to be steeper: the consensus looks for a 6% downturn to an annualized pace of 4.75 million units. With sales already down nearly 13% from last year, a rebound isn't looking likely until June.

The Pending Home Sales Index, which anticipates this index by looking at contracts that have been signed but not finalized, fell 11.6% in April.

That alone implies a double-digit percentage drop in May, yet mortgage applications to buy homes were only 2% lower in May, implying a smaller sales decline, according to IHS Global Insight.

"The wild card is how active investors were in the market during the month," they said. "Our projection is that existing home sales will drop about 6% in May to a 4.75 million rate, with investors playing a slightly larger role in May than in April."

Economists at BBVA note that with forecasts ranging from a 9% decline to a 2.4% gain, there is much uncertainty surrounding the real estate market. 

"Ample supply of price- reduced or distressed properties should positively impact existing home sales," they said. "Nevertheless, low consumer expectations, weak labor markets, and downside price risk are pushing housing demand away from ownership to a more defensive rental position. Therefore, we expect existing home sales to decline on a seasonally-adjusted basis in May."