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Mortgage Rates Fall on Heavy Buying in Bonds

A surprisingly weak employment report for May capped a great week for U.S. Treasuries. Strong demand for U.S. Treasury securities sent the yield on the benchmark 10-year note, which moves in the opposite direction of price, to a 16-month low. In addition to a poor showing in employment, rallies were sparked by a cooling of inflation fears, strong interest from foreign buyers and the suggestion by a Fed official that the current cycle of rate increases could be nearing the end. The resulting sharp decline in Treasury yields allowed mortgage lenders to edge rates down on many products. Only 78,000 jobs were added to non-farm payrolls in May - far below estimates of 185,000 additions, and way below the 274,000 jobs added in April. Hourly wages showed no inflationary tendencies, rising 0.2 percent to an average of $16.03 per hour. In separate reports, inflation-friendly manufacturing data eased concerns about higher prices. Both the Chicago PMI and the ISM index on May manufacturing were well below forecasts. The PMI slid to 54.1 in May from 65.6 the previous month, and the ISM plummeted to 51.4 - perilously close to the 50-mark that divides expansion from contraction. Safe-haven buying due to uncertainty in the European markets added optimism, as did the Dallas Fed president's comments on rate hikes. Richard Fisher said the Fed was in the eighth inning of its tightening cycle and entering the ninth, leading many to believe the expected June 30 increase would be the last for a while.

A jump in first-quarter productivity and costs raised yellow flags regarding inflation, with productivity revised upward to 2.9 percent from the initial 2.6-percent reading. The big increase, however, was in costs, which surged to 3.3 percent from 2.2 percent. Factory orders came in below forecasts but rose 0.9 percent in April - the biggest increase in five months. March orders were revised upward to plus 0.7 percent from plus 0.1 percent. While these reports slowed buying in Treasuries, they did not halt it.

Mortgage applications stalled for the week ended May 27, according to the Mortgage Bankers Association. Applications to purchase fell 4.1 percent, while refinancings were off 1.2 percent. The rate on the 30-year-fixed mortgage (based on zero discount points) is at its lowest level since February -- just above 5.375 percent. The 15-year fixed-rate is holding near 5.0 percent, while the introductory rate on the volatile one-year adjustable-rate mortgage remains at 3.375 percent.

The next few days offer little in the way of economic news, with only the U.S. trade balance for April, Wholesale Inventories and U.S. Import Price Indexes for May, and the weekly jobless claims due. Reaction to the May employment report should keep Treasury yields at low levels for some time to come. And lack of influential data should allow mortgage rates to continue edging down on many products.

Carolyn Siegel, Staff Writer - Interest.com