Article Archive Article PDF

Mortgage Rates Remain Low for Now

U.S. Treasuries rallied on, keeping mortgage rates at attractive levels. To no one's surprise, the Fed's announcement on interest rates was the main influence on bonds and it was friendly. Although short-term interest rates were hiked by the expected one-quarter of 1 percent, traders were relieved to hear that the Fed will increase short-term interest rates at a "measured" pace rather than in giant steps. Aggressive buying sent Treasury prices soaring and yields, which move in the opposite direction of prices, to six-week lows. Traders also saw signs that foreign investment in Treasuries would continue, giving them an added boost. But a big late-week leap by the dollar, strong economic reports and a rash of technical selling sent Treasuries tumbling and yields shot up. This turn of events could force mortgage lenders to edge up some rates. A steep decline in first-time jobless claims took their toll on Treasuries. Claims posted their largest decline in three years, dropping 43,000 to 317,000. The four-week average fell to 337,500 and continued claims, those collecting benefits for more than one week, also declined. The consumer price index, which checks for retail inflation, rose by an expected 0.2 percent, and retail sales climbed by a mere 0.1 percent. Excluding weak auto sales, they increased by a respectable 0.5 percent. Housing starts, however, plummeted 13 percent last month-the biggest drop in 11 years. Both the U.S. trade deficit and the current account deficit (which includes foreign trade and investment flows) widened but were narrower than forecasts-a plus for Treasuries. But manufacturing indices from New York and Philadelphia rose substantially, adding downward pressure. Low mortgage rates during the week ended December10 had little effect on mortgage transactions, according to the Mortgage Bankers Association. Applications to purchase were down 0.4 percent and refis dropped 2 percent. Rates edged down on many mortgage products, with the 30-year fixed-rate mortgage (based on zero discount points) well below 5.5 percent. The 15-year fixed-rate mortgage fell to just above 4.875 percent, while the introductory rate on the volatile one-year adjustable-rate mortgage rose to 3.375 percent.

The coming trading week will be shortened by the Christmas holiday, but there will be a number of influential economic reports released. These include the final third-quarter GDP, the index of leading indicators that looks at future economic conditions, durable goods orders, first-time claims, personal income and outlays, and new home sales. Some of these reports could move the markets, but bond traders also will continue to watch the dollar. Considering Thursday-Friday sell-off, it is likely that some mortgage rates will tick up slightly at the beginning of next week.