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Mortgage Rates Hit Two-Month Highs

Comments by a host of Fed bank presidents, a weak report on September manufacturing conditions and the Employment Report for last month provided bond traders with multiple reasons to sell, and sell they did. The price of U.S. Treasury securities tumbled and their yields, which move in the opposite direction of prices, rose to two-month highs. Fed officials were unanimous in stating that the Fed would continue to raise short-term interest rates in order to contain inflation, and the manufacturing report revealed a huge increase in prices paid - another sign of inflation. Job losses proved to be milder than forecast, putting additional pressure on Treasuries. Rising yields, which lenders use as a guide to set rates, forced mortgage rates up to their highest levels since early August. Job losses in September totaled 35,000 - far less than estimates that ranged from 120,000 to 200,000 losses. This led many to conclude that in spite of the recent hurricanes the nation's economy is strong. Jobs added in August were revised upward by 42,000 to 211,000. This better-than-expected report re-enforced the notion that the Fed will stick with its credit-tightening program. The unemployment rate, however, rose to 5.1 percent, but it is determined by a separate survey. The Institute of Supply Management's (ISM) index on manufacturing conditions - the other market mover -- climbed to 59.4 from 53.6 the previous month. But it was the jump in prices paid - to 78 versus 62.5 - that got the attention of bond traders, as it was the biggest one-month increase in 15 years. Two days later the ISM index on non-manufacturing conditions, i.e., the service sector, recorded a sharp decline. The index plunged to 53.3 from 65, but like the manufacturing index, the prices-paid category rose more than expected.

Rising mortgage rates left applications nearly flat for the week ended to Sept. 30, according to the Mortgage Bankers Association. Purchase applications fell 1.9 percent, while refis crept up 0.1 percent. The rate on the 30-year-fixed mortgage (based on zero discount points) climbed near 5.75 percent, while the 15-year fixed-rate is well above 5.25 percent. The introductory rate on the volatile one-year ARM is below 4 percent.

There are a number of influential reports on tap, but they won't be released until the end of the week, which leaves traders to reflect on the Employment Report, rate hikes and inflation concerns. When the reports do come out, attention will focus on Retail Sales and the Consumer Price Index for September, which looks for inflation at the retail level. Until these reports are made public, however, there appears to be little impetus for mortgage rates to make substantial moves in one direction or the other.

Carolyn Siegel

carolyn@interest.com