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Mortgage rates poised to rise

Solid economic reports and troublesome news from the euro zone resulted in more selling than buying in U.S. Treasury securities. In fact, aggressive selling on Thursday and Friday sent the yield on the benchmark 10-year note to its highest level in almost two years. Yields move in the opposite direction of prices. The end-of-week spike in yields has begun driving mortgage rates higher. Selling stemmed from news that the European Central Bank, or ECB, raised interest rates. In addition, the ECB president touted economic strength in the euro zone. And now Japan may be raising its rates. Not only could this draw money out of U.S. Treasuries, but it also might influence the Fed to keep raising short-term interest rates in order to compete for investment funds.

Better-than-expected reports on gross domestic product, or GDP, manufacturing and a report on income and spending showing benign wage pressures were offset by weak home sales and a dip in consumer confidence. Revised fourth-quarter GDP rose 1.6 percent from the advance 1.1 percent. This was substantially lower than the 4.1 percent gain in the third-quarter. A ripple effect from Hurricane Katrina was cited as probable cause for the decline. The ISM report on February manufacturing conditions rose to 56.7, with new orders and an increase in employment pushing the index higher. Prices paid - an inflation component - dropped to 62.5 from 65, the January reading.

Home sales in January were lower than expected, with new home sales falling 5 percent to an annual rate of 1.23 million units. Existing home sales slid 2.8 percent, to an annual rate of 6.56 million units - the smallest in two years. And consumer confidence fell to 101.7, with future expectations at a three-year low. The February consumer sentiment survey from the University of Michigan also came in below forecasts. First-time unemployment claims for the week ended Feb. 24 rose by 15,000 to 294,000, but underlying numbers indicate strength in the labor market -- a sign of possible future inflation.

Mortgage applications edged up for the week ended Feb. 24, according to the Mortgage Bankers Association. Applications to purchase rose 1.9 percent, while refis rose only 0.1 percent. The rate on the 30-year fixed-rate mortgage (based on zero discount points) is just above 6 percent, while the 15-year fixed-rate mortgage edged up over 5.625 percent. The rate on the five-year, adjustable-rate mortgage is also just above 5.625 percent.

The first full week of March features little in the way of economic news, after a glut of reports the last week. The February employment report, due March 10, is the most important indicator and will likely influence the markets. Factory orders, wholesale inventories and the trade deficit for January along with fourth-quarter productivity and costs are low-impact reports.

Due to the sharp rise in yields, it is likely that mortgage lenders will be forced to increase rates on most mortgage products.