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Mortgage rates remain steady

Just when yields on U.S. Treasury securities were on their way down, signs of inflation in the April consumer price index, or CPI, set off alarms and sent Treasury yields, which move in the opposite direction of prices, soaring. Mortgage rates, which are based on bond yields, also began to rebound after edging down early in the week. Gains in the CPI outpaced Wall Street's estimates, rising 0.6 percent, with an 8.8 percent jump in gas prices the main villain. But it was the second straight 0.3 percent increase in the core rate, which excludes volatile food and energy prices that got traders' attention, as it is one of the Fed's favored inflation indicators. Traders fear inflation as it erodes the value of fixed-rate assets. Rising mortgage and rent payments were responsible for half of the core's increase.

Prior to Wednesday's CPI sell-off, news was bond friendly. The producer price index, which checks wholesale inflation, found little evidence rising prices, except for gasoline. But the all-important core rate rose a benign 0.1 percent. Strong buying in bonds sent yields down as traders hoped the Fed might pause its rate hikes. Weak housing starts and building permits in April further fueled the rally. Starts were off 7.5 percent to an annual rate of 1.85 million units, while building permits fell 5.7 percent to an annual rate of 1.98 million.

First-time unemployment claims surged by 42,000 to 367,000, due in large part to a partial government shutdown in Puerto Rico. Excluding that, analysts believe claims would have been at 312,000 for the week ended May 13. The more influential four-week moving average, which smoothes volatility, climbed to 333,250 - its highest point since the post-hurricane weeks in October. This sent buyers back to bonds, and yields slid after the CPI sell-off.

The week began on an up note for bonds, as the Federal Reserve's NY Empire State index of May manufacturing conditions dipped unexpectedly to 12.4 from 15.8 - a sign of slowing economic growth. On Thursday the Philly Fed index for May rose to 14.4 from 12.3, but bonds continued to rally.

Mortgage applications bounced back for the week ended May 12. According to the Mortgage Bankers Association, purchase applications rose 2.4 percent, while refinances shot up 8.4 percent. The 30-year fixed-rate mortgage (based on zero discount points) is slightly below 6.75 percent, while the 15-year fixed-rate mortgage is at 6.33 percent. The rate on the five-year, adjustable-rate mortgage edged down to 6.33 percent.

The last full week of May features a few influential reports, beginning with durable goods orders and new and existing home sales for April. Reports showing weakness in the housing market and slowing of demand for big-ticket durables could spur buying in Treasuries. But an upward revision in the first-quarter gross domestic product could turn buyers into sellers. If the push and pull from these reports even out, mortgage rates should remain close to present levels.