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Mortgage rates march higher

A slew of economic reports pointing to dynamic economic growth and a revised take on the Fed's intention to pause its rate hike program ignited strong selling in U.S. Treasury securities. This sent bond prices plummeting and yields, which move in the opposite direction of prices, upward. In fact, the yield on the benchmark 10-year note, which lenders use as a guide to set mortgage rates, climbed to 5.15 percent, its highest level in four years. This forced lenders to increase rates on most mortgage products. Treasuries got a break on Friday, as the April employment report showed only 138,000 jobs added to nonfarm payrolls. The news sparked in mini-rally in Treasuries, with traders hopeful that softening in the labor market might influence the Fed to halt its rate increases after May 10. Enthusiasm was contained, however, as the report also showed a 9-cent increase in the hourly wage, bringing it to $16.61 per hour. Higher labor costs can be inflationary, as they may lead to higher prices. The unemployment rate, taken from a separate survey, remained at 4.7 percent.

Personal income and spending exceeded Wall Street expectations, with income rising 0.8 percent, and spending climbing 0.6 percent in March. Personal consumption expenditures, one of the Fed's favorite inflation indicators, rose 0.3 percent - the biggest gain since October. The Institute of Supply Management, or ISM, index on manufacturing conditions for April also beat forecasts, rising to 57.3 from 55.2. Treasuries were further pummeled when Fed chairman Ben Bernanke said his statement regarding a possible pause in the rate-hike program had been misinterpreted.

First-quarter productivity and costs showed productivity up 3.2 percent, while unit labor costs rose 2.5 percent. Bonds handled the news well, however. First-time unemployment claims for the week ended May 1 crept upward, hitting 322,000 - a jump of 5,000. The four-week average, which smoothes volatility, climbed to 314,250.

Mortgage applications rebounded with force for the week ended April 28. According to the Mortgage Bankers Association, applications to purchase soared 11.3 percent, while refinances rose 5.1 percent. The 30-year fixed-rate mortgage (based on zero discount points) hit 6.5 percent, while the 15-year fixed-rate mortgage is at 6.125 percent. The rate on the five-year, adjustable-rate mortgage moved up to 6.125 percent.

The Fed meeting on Wednesday, May 10 is the biggest event of the week. Although short-term interest rates are expected to climb by a quarter percentage point, the markets are far more interested in what the Fed will say about future rate hikes, and hints of any change in the Fed's current outlook will certainly move the markets.

Retail sales for April, due Thursday, also could impact the markets, as strong sales would indicate a thriving economy that might have to be reined in with more rate hikes. First-time unemployment claims are also due, along with a consumer sentiment survey. Continued strong reports would likely weigh on Treasuries and keep mortgage rates near present elevated levels.

Carolyn Siegel, associate editor

Carolyn@interest.com