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Mortgage Rates Climb

A steady flow of bullish economic reports had their way with U.S. Treasury securities. Strength in manufacturing, employment, and the Gross Domestic Product signaled continued rate hikes from the Fed and spurred strong selling. Bond prices plunged and yields, which move in the opposite direction of prices, soared, with the yield on the benchmark 10-year note hitting its highest level since April. Selling was temporarily stalled by news of the return of the 30-year bond, which was discontinued in 2001. But a strong employment report for July sparked another round of selling as concerns about inflation and the rate hikes necessary to control it sent yields back to four-month highs. High yields have forced lenders to increase rates on many mortgage products - especially those with adjustable rates. The employment report showed 207,000 jobs added to non-farm payrolls, exceeding the forecast for 183,000. In addition, June numbers were revised upward by 20,000 and hourly labor costs rose $0.06 an hour - the biggest increase in a year. The ISM index on manufacturing conditions for July climbed to 56.6 - its highest level of the year. The less influential ISM index on the service sector edged down to 60.5 from 62.2, but included a spike in prices paid - an early sign of inflation. In a separate report, personal income in June rose by a stronger-than-expected 0.5 percent, while personal spending climbed 0.8 percent, due in part to the purchase of employee-discounted autos.

June factory orders rose by an expected 1.0 percent, but the May increase was upwardly revised to 3.6 percent. First-time unemployment claims for the week ended July 29 fell by 1,000 to 312,000, while the four-week average, which smoothes volatility, edged down to 316,750.

An increase in mortgage rates during the week ended July 29 provided mixed results. Applications to purchase rose 1.9 percent, but refis edged down 3.0 percent, according to the Mortgage Bankers Association. The rate on the 30-year-fixed mortgage (based on zero discount points) is somewhat below 5.75 percent, while the 15-year fixed-rate is right at 5.25 percent. The introductory rate on the volatile one-year ARM is at 3.75 percent.

Economic reports are slim until the end of the week when July Retail Sales, the June trade deficit, and a sentiment survey are due. The early week news revolves around Tuesday's Fed decision on interest rates, which are expected to rise another 25 basis points. But investors will focus on the statement, looking for clues of further intentions. Treasuries should continue to feel pressure from the July Employment Report and if economic news is strong, mortgage rates will likely continue to edge up.

Carolyn Siegel

carolyn@interest.com