Article Archive Article PDF

Mortgage Rates Rise on Inflation Fears Then Fall

Fears of inflation, brought about by the minutes from the December 14 meeting of the Fed, put extra pressure on U.S. Treasuries. The Fed stated that while risks of inflation are balanced for now, officials are concerned about higher prices in the future. This sparked a big sell-off in Treasuries, sending prices plunging and yields, which move in the opposite direction of prices, soaring. Although inflation is not welcome by the financial markets, Treasury traders especially fear it as it erodes the value of fixed-rate assets, such as bonds. Upbeat economic news kept the pressure on, but a big increase in jobless claims turned things around. As a result, mortgage lenders who use Treasury yields as guides to set mortgage rates moved them up only to reverse the change later in the week. The national ISM index on manufacturing conditions for December rose to 58.6 - a touch higher than forecasts. But a weak employment component - the lowest in 15 months - softened the news. The ISM index on the service sector also rose, and although employment was slightly down, new orders and prices paid were up. Bond traders greeted the increase in the prices-paid component with a wary eye. Factory orders climbed 1.2 percent in November - the biggest increase in four months - due in large part to orders for aircraft, but new construction unexpectedly fell 0.4 percent in November. For the week ended Dec. 31, first-time unemployment claims jumped 43,000 to 364,000 - the biggest one-week increase in almost three years - turning Treasuries around. Seasonal factors were cited as possible reasons for the increase. Retail sales reports for December from some of the major chains are coming in mixed. Mortgage applications were down for the last week of the year. Applications to purchase slid 13.7 percent, according to the Mortgage Bankers Association, and refinances were down 5.7 percent, although they accounted for 48 percent of mortgage transactions. Rates moved higher on some products. The 30-year fixed-rate mortgage (based on zero discount points) had been flirting with 5.625 percent but returned to 5.5 percent, and the 15-year fixed-rate is now below 5 percent. The introductory rate on the volatile one-year adjustable-rate mortgage fell to above 3.25 percent.

Several influential economic indicators are on the docket including retail sales for December; the producer price index, which checks for inflation at the wholesale level; industrial production; and a consumer sentiment survey. The U.S. International Trade report is also on the schedule and it will be closely watched, as the growing trade deficit is partially responsible for the weak dollar. The results of the December employment report also will steer the direction of Treasuries, with a strong report pushing yields higher and a weak one having the opposite effect. If economic news comes in near analysts' estimates, mortgage rates should hold near present levels.