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Steady Selling in Treasuries Sends Mortgage Rates Up Ever since Fed chairman Alan Greenspan told the Joint Committee of Congress on June 9 that rate increases will continue at a 'measured' pace, “sell” has been the mantra for U.S. Treasuries. Bond traders hoped the Fed would pause its rate-hike program after the June 30 meeting, but when the Fed chief axed this possibility, disappointment turned to selling - in spite of several non-inflationary economic indicators. These reports were given the cold shoulder and Treasuries continued to sell, sending prices down and yields, which move in the opposite direction of prices, up. As a result, mortgage rates that are based on yields edged up on most products.

Two key inflation indicators showed benign growth in wholesale and retail prices. The Producer Price Index for May fell 0.6 percent due to lower oil prices last month. The core rate, which excludes volatile food and energy prices, rose by only 0.1 percent. Low energy prices also influenced the Consumer Price Index, which fell 0.1 percent. The core rate edged up by a less-than-expected 0.1 percent. Traders, who would normally welcome signs of slowing consumer spending, ignored weak retail sales, which fell 0.5 percent in May. Other indicators with impact included a 0.2-percent increase in May housing starts, which translated to an annual rate of a still-healthy 2.01 million starts. Building permits, however, fell to an annual rate of 2.05 million, while Industrial Production reversed an April loss, rising 0.4 percent in May. First-time claims for unemployment benefits for the week ended June 10 rose by 1,000 to 333,000, while the more closely watched four-week average moved up to 335,000. Regional manufacturing indexes for June were mixed, with the NY Empire State index climbing out of negative territory to 11.6. The Philly Fed survey, however, plunged to a minus 2.2 from 7.3, when an increase was forecast. This spurred a mini-rally in bonds.

Applications for home purchases hit an all-time high for the week ended June 10, according to the Mortgage Bankers Association. Low mortgage rates sent purchase applications up 10.3 percent, while applications to refinance soared 25.6 percent.

Selling in Treasuries sent rates on some products up during the week. The rate on the 30-year-fixed mortgage (based on zero discount points) is close to 5.5 percent, up from 5.375 percent. The 15-year fixed-rate is well above 5.0 percent, while the introductory rate on the volatile one-year adjustable-rate mortgage is at 3.625 percent.

There is little economic news set for the week of June 20. May releases include New and Existing home sales, Durable Goods Orders, and the Index of Leading Indicators, which looks at the economy over the next three to six months. The drought of economic news should leave the markets looking elsewhere for guidance. Additionally, there may be caution prior to the June 29-30 meeting of the Fed. A relatively quiet market should result in stable mortgage rates and some could edge down.

Carolyn Siegel

carolyn@interest.com