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Mortgage Rates Volatile as Year Comes to a Close

Volatility has been the watchword in the U.S. Treasury market. Light volume has resulted in small trades making big waves. Big moves in oil prices, and upward and downward leaps in economic reports have sent prices and therefore yields, which move in the opposite direction of prices, on a roller coaster ride. Profit taking was the one steady influence at the end of what could only be termed as a surprisingly strong year for Treasuries, but it only kept a lid on gains, as did a weak two-year note auction. In 2004, yields on the benchmark 10-year note held in the lower 4 percent and upper 3 percent range for most of the year, resulting in attractive mortgage rates. This week was no exception. Although yields fluctuated and mortgage rates followed, they remain near historic low levels. Consumer confidence made its sharpest gain since July, rising to 102.3. Jobs, oil and the stock market are key to confidence, and each of these showed improvement this month. But a confident consumer is a spending consumer and this took its toll on bonds. Existing home sales (EHS) in November surprised everyone, hitting a record-high annual rate of 6.94 million units. This was especially welcome news because EHS represent approximately 85 percent of all home sales. The Chicago Purchasing Managers' index of manufacturing conditions, which is often a precursor to the national ISM index, fell to 61.2. New orders were down and employment slid by more than 10 points, sparking a mini-rally in Treasuries. First-time unemployment claims fell by 5,000 to 326,000 - defying forecasts - and the closely watched four-week average edged down to 333,500. Mortgage activity flip-flopped in the week ended December 24. According to the Mortgage Bankers Association, applications to purchase rose 2.7 percent after falling the previous week, and refis declined 7.9 percent after posting a gain. Refinancing accounted for 46 percent of mortgage transactions. Rates moved higher on some products, but were close to last week's levels. The 30-year fixed-rate mortgage (based on zero discount points) is well above 5.5 percent, and the 15-year fixed-rate edged over 5 percent. The introductory rate on the volatile one-year adjustable-rate mortgage is right at 3.5 percent.

The first week of the New Year begins with a full slate of economic indicators and ends with a bang, as the December employment report will be released on Friday. Prior to that the ISM index on manufacturing conditions is due along with new construction and factory orders. The ISM index on the service sector and weekly unemployment claims also are on the docket. Although the jobs report will be the linchpin for the week, the ISM indices will weigh in. If the manufacturing numbers are down, it would be a plus for Treasuries. But if reports come in close to forecasts, mortgage rates are likely to remain fairly steady.