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Treasuries Volatile But Mortgage Rates Edge Down

U.S. Treasury securities yields were up one day and down the next as mixed economic data kept bond traders busy. A strong regional manufacturing report and a temporary dip in oil prices spurred selling in Treasuries, with prices falling and yields, which move in the opposite direction of prices, rising. Selling resulted from concern that strong manufacturing data could stir more aggressive Fed rate hikes, while a drop in oil prices might reawaken consumer urges to splurge. Treasuries have been following oil prices, as traders feel high prices will slow the economy and consumer spending without requiring Fed intervention. But conflicting inflation reports clouded the outlook for Treasuries. Rallies, however, outweighed sell-offs and as a result mortgage rates, which are based on Treasury yields, edged down on most products. The release of the July Consumer Price Index (CPI) showed inflation at the retail level to be well-contained. Although the CPI rose 0.5 percent due to the increase in oil, the core rate, which excludes volatile energy and food prices, edged up only 0.1 percent, spurring the best one-day Treasury price gains in months. Adding to optimism, Industrial Production in July rose only 0.1 percent, which was below forecasts and down from June.

The Producer Price Index (PPI) for July was another story. It rose 1.0 percent, double forecasts. The index, which monitors wholesale prices, also revealed a core increase of 0.4 percent. Although energy was the biggest culprit, the high core number saw Treasuries give back most of the gains made from the CPI. The NY Empire State August index on manufacturing also came in stronger than expected, putting additional pressure on Treasuries. Although the Philly Fed survey on manufacturing climbed to 17.5 in August from 9.6 in July, the news was ignored. But weekly first-time unemployment claims rose to 316,000 for the week ended August 12, and a plus for Treasuries. Purchase applications held steady but demand for refis climbed during the week ended August 12, according to the Mortgage Bankers Association. Applications to purchase edged up only 0.1 percent, but refis posted a strong 5-percent increase. The rate on the 30-year-fixed mortgage (based on zero discount points) fell below 5.625 percent, while the 15-year fixed-rate is under 5.25 percent. The introductory rate on the one-year ARM has been extremely volatile, moving between 3.75 percent and 4.25 percent.

The economic calendar is relatively quiet for the week of August 22. New and existing home sales for July will be closely watched for signs of change. But July's Durable Goods Orders will probably wield the most influence, as they reflect consumer and business spending on big-ticket items. And the University of Michigan final consumer sentiment survey for August could be a factor if it shows a big shift in confidence. Meanwhile, mortgage rates should remain fairly steady or even edge down, based on pending economic reports.

Carolyn Siegel

carolyn@interest.com