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Mortgage Rates Hold Their Ground

The Federal Open Markets Commit-tee hiked short-term interest rates by 25 basis points - the ninth such move in the past year. U.S. Treasury yields ticked down slightly in the wake of the expected decision. What did move bonds during the week were big increases in consumer confidence, volatile oil prices, and mixed economic reports, making for an erratic week. Ag-gressive selling one day, which sent Treasury prices down and yields up, was followed the next day by a mini-rally that pushed yields back down. But bullish reports on Friday sent yields climbing. Yields move in the opposite direction of prices. Mortgage rates, which are based on yields, held close to last week's levels. The Fed rate hike, which increased the target fed funds rate to 3.25 percent, was accompanied by a statement that was little-changed from previous ones. In it, the Fed said that it would remove accommodation at a “measured” pace. The Fed added that inflation pressures stayed elevated, but reiterated that long-term inflation remains well contained.

A huge increase in consumer confidence - the biggest in three years - put pressure on Treasuries, as it evoked visions of stronger consumption that would propel the economy. Confidence rose to 105.8. The final revision of first-quarter Gross Domestic Product (GDP) came in at 3.8 percent growth rate - matching the fourth quarter of 2004. Big gains in homebuilding and exports lifted economic output, which put pressure on bonds. An inflation indicator within the GDP, however, was benign. The Chicago Purchasing Managers' Index on June Business Conditions fell short of expectations, coming in at 53.6. But the ISM index on manufacturing conditions in June rose more than two points to 53.8. First-time unemployment claims dipped by 6,000, bringing the total for the week ended June 24 to a two-month low of 310,000. The more closely watched four-week average rose to 323,500. Personal Income/Spending for May barely moved, with income up 0.2 percent and spending flat. New Construction fell 0.9 percent in May, while the University of Michigan's consumer sentiment report for June soared to 96 from 86.8 in May.

Although mortgage rates remained low during the week ended June 24, loan applications tailed off. According to the Mortgage Bankers Association, applications to purchase fell 0.4 percent, while refis edged down 1.8 percent. The rate on the 30-year-fixed mortgage (based on zero discount points) remains just over 5.375 percent, while the 15-year fixed-rate is holding near 5.0 percent. The introductory rate on the one-year ARM rose to 3.5 percent.

The three-day Fourth of July weekend resulted in a shortened trading week, but it is packed with news. Reports on manufacturing, factory orders, the service sector and productivity will keep market-watchers busy, but the focus will be on the end of the week when the employment report for June will be released. As always, this report will impact the markets one way or another depending on how many jobs were added to non-farm payrolls. If the economic reports come in on target and show no signs of inflation or excessive economic growth, mortgage rates should remain near present low levels.

Carolyn Siegel

carolyn@interest.com