SOME TECHNICAL STUFF.   Mortgage rates in the United States are largely a function of the difference between the yield on mortgage backed securities (MBS) and the yield on Treasury securities.  The yield spread between the two is the premium that is paid to investors for investing in riskier MBS. 

Currently, the yield spread is wider than it has been in five months.  Normally widening spreads would equal higher mortgage rates,  but rates have decreased or stayed the same for the last few weeks. The current average mortgage rate on a 30-year fixed mortgage is 4.80 percent, just above the record low of 4.71 in December 2009, but still well beneath the 52 week high of 5.59 percent in June 2009.

So what is going on here?  You  have likely noticed that European markets are in a frenzy over debt troubles in Portugal, Spain, Ireland, Italy, and Greece. (PIIGS) andmost recently Hungary.   There is serious concern that these countries may default on their debts or need to be bailed out.  Moody's has already downgraded Greek bonds to junk status and has warned that Portugal and Spain are close to being downgraded.

Risk-averse investors are fleeing to the relative safety of U.S. Treasuries.  This increased demand leads to a lower Treasury yield.  So despite the widening spread between MBS and Treasuries, the declining Treasury yield means that mortgage rates are decreasing or holding steady. Expect this type of short-term volatility to continue in the coming weeks as markets respond to various news from European markets.

While there is a large amount of uncertainty in the markets, most people believe that the probability of ratings downgrades for Portugal and Spain are already reflected in  current yields.  What does not seem to be accounted for is the very real possibility of ratings downgrades in Ireland and Italy, both of which carry considerable debt burdens with relation to their GDP and whose economies are at least as precariously positioned as Greece and Spain.

HOW HAS ALL THIS NEWS AFFECTED RATES ???