Article Archive Article PDF

Mortgage Rates Begin to Climb

Mortgage rates are creeping up in response to U.S. Treasury sell-offs. The stronger-than-expected October employment report, which saw the addition of a whopping 337,000 jobs, ignited selling of government issues, as traders feared aggressive action by the Fed. Treasury yields, which move in the opposite direction of prices, began to rise and additional jolts spurred them on. As expected, the Fed raised the fed funds rate to 2 percent, and suggested that it would continue to increase rates “at a pace that is likely to be measured.” Reaction to this move, which was fully priced in, had less to do with the price of Treasuries than did economic news and the fall of the dollar, which discourages foreign investment. Although some mortgage rates have remained stable, introductory rates on many adjustable products have risen. Economic reports came in on target. October retail sales rose 0.2 percent, but excluding slow auto sales, they rose a healthy 0.9 percent. The U.S. trade deficit narrowed in September due to an increase in U.S. exports, which may have been aided by a weak dollar. The deficit, however, remains at a hefty $51.6 billion. Wholesale inventories rose 0.5 percent in October—less than expected, and business inventories eked up by a weaker-than-expected 0.1 percent. Unemployment claims for the week ended November 5 rose by a scant 2,000 to 333,000, but the more telling four-week average declined to 336,000. The University of Michigan preliminary consumer sentiment survey rose almost four points to 95.5 from two weeks ago, but a bigger leap was hoped for. A slight uptick in mortgage rates during the week ended November 5 put a crimp in mortgage activity, according to the Mortgage Bankers Association. Applica-tions to purchase edged down 2.7 percent, while refinancing slid 6.7 percent, accounting for only 45 percent of mortgage transactions. The 30-year fixed-rate mortgage (based on zero discount points) crept well above 5.5 percent, while the 15-year fixed-rate mortgage rose to 5 percent. The introductory rate on the volatile one-year adjustable-rate jumped to 3.375 percent. Volatility could rule over the next few days, with a host of market-moving economic reports due. Data on inflation from the producer and consumer price indices will be of prime interest to bond traders, as inflation erodes the value of fixed-rate assets. In addition, there are several reports on the status of manufacturing across the nation, news on housing starts and building permits for October, as well as first-time unemployment claims. If reports reflect growing optimism that the economy is indeed gathering strength, this could put pressure on Treasuries. If selling of government issues continues and yields climb, mortgage rates could edge up further.