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Mortgage Rates Climb

Mortgage rates have been inching their way up for a couple of weeks, but the progression has been slow. Things changed, however, when a report suggesting inflation might be on the rise was released and rampant selling in U.S. Treasuries took hold. Bond traders fear inflation as it erodes value of fixed-rate assets, such as bonds. Selling forced Treasury prices down sharply and sent yields, which move in the opposite direction of prices, soaring. In fact, the yield on the 10-year note that lenders use as a guide to set mortgage rates climbed to its highest level since August 2004. These increases were factored into mortgage rates, which rose in almost all categories. But the February Employment report sparked a big Treasury rally, sending yields tumbling. The actual impact of this move will not likely be known for a day or two. In February 262,000 jobs were added to non-farm payrolls, which was better than expected but not as strong as feared. And with the workweek and hourly wages holding steady, inflation was not a factor. The culprit during the week was the Price Index for Consumer Spending - a component of the Commerce Dept.'s Personal Income/Outlay report for January and one of the Federal Reserve's favored inflation indices. Although the headline numbers were in line, core spending saw its biggest increase since October 2001. In a separate report, new home sales fell by 9.2 percent - more than expected. The Chicago PMI index on February manufacturing conditions edged up, but the employment index rose significantly, stoking fears of a strong jobs report. The nationwide ISM index on manufacturing, which came out the next day, told a different story. Both 'employment' and 'prices paid' were down, soothing traders. A revised fourth-quarter productivity and costs report also calmed traders' nerves, as it showed a strong upward revision in productivity, which allows wages to increase without concerns of inflation.

A weekly survey of mortgage applications showed refis down and purchases up as home buyers scrambled to take advantage of still-low rates. For the week ended Feb. 25, applications to purchase rose 5.3 percent, while refis plunged 9.9 percent, according to the Mortgage Bankers Association. The 30-year fixed-rate mortgage (based on zero discount points) is just below 5.625 percent, while the 15-year fixed-rate is above 5.125 percent. The introductory rate on the one-year adjustable-rate mortgage remains under 3.625 percent.

Traders will get a break the week of March 7, with few reports on the docket. The only market-movers appear to be the U.S. trade deficit for January and weekly first-time employment claims. Other reports, such as the monthly Treasury budget and consumer credit releases, are usually non-factors. The Fed's so-called Beige Book, a national economic overview due out Wednesday, is released 13 days prior to each Fed meeting and provides an overview of the nation's economy, which could rattle the markets. With the yield on the 10-year note continuing to drop, it is possible that mortgage rates could edge back down to previous levels and stay there due to lack of consequential economic data being released.