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Fed Comments Send Mortgage Rates Up

It was a tough week for U.S. Treasuries, and as a result mortgage rates climbed. As expected, the Federal Reserve on Tuesday signaled a 25-basis-point hike in short-term interest rates, but it was the Fed's concern about inflation in the accompanying statement that ignited a huge sell-off in Treasuries. The Fed said, "Pressures on inflation have picked up in recent months and pricing power is more evident.” Inflation erodes the value of fixed-rate assets, such as bonds. The specter of inflation in the not-too-distant future sparked selling that sent Treasury prices plunging and yields, which move in the opposite direction of prices, soaring. The spike in Treasury yields that are used as guides to set mortgage rates forced lenders to increase rates on most mortgage products. A stronger-than-expected Consumer Price Index (CPI) also rattled traders, but oversold conditions resulting from Tuesday's credit tightening kept a lid on selling. The CPI, which checks inflation at the retail level, rose 0.4 percent in February and the core rate, which excludes volatile food and energy prices, rose 0.3 percent - both a tad higher than analysts' expectations. The Producer Price Index was more bond-friendly, rising 0.4 percent, but showing a core increase of a benign 0.1 percent. New homes sales in February stunned the markets, rising 9.4 percent to an annual rate of 1.23 million units - far above forecasts. Existing home sales remained strong in February. Although they edged down 0.4 percent, they came in at a still-healthy annual rate of 6.79 million units. February Durable Goods Orders disappointed, increasing by a far-less-than-expected 0.3 percent. First-time unemployment claims for the week ended March 18 rose by 3,000. Rising mortgage rates took their toll on mortgage activity for the week ended March 18, according to the Mortgage Bankers Association. Applications to purchase fell 3.5 percent, while refinances plunged 16.5 percent. Rates rose on the majority of products, with the 30-year fixed-rate mortgage (based on zero discount points) just under 5.875 percent. The 15-year fixed-rate rose to just below 5.375 percent, while the introductory rate on the one-year adjustable-rate mortgage is slightly under 3.625 percent.

The last week of March features reports on manufacturing conditions, consumer confidence and the final fourth-quarter Gross Domestic Product, with manufacturing and consumer data wielding the most clout. The week ends with the March employment report - the 800-pound gorilla of economic news. Although job creation will be key, there will likely be more focus on the wages component, as inflationary pressures remain in the fore. Manufacturing data could move Treasuries up or down, but if the majority of reports come in on target, mortgage rates should remain near their higher levels.