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Mortgage Rates Remain at 15-Month Highs

Concerns about inflation, the sworn enemy of fixed-rate assets such as bonds, kept pressure on U.S. Treasury security yields, which move in the opposite direction of prices. Economic news - a mixed bag at best -- didn't affect Treasuries as adversely as expected, since rate hikes for the remainder of the year have been priced in. Fed officials continue to warn that rate hikes are necessary to contain inflation, but bond traders are taking comfort in their vigilance. Although yields have wavered, most mortgage rates are holding at high levels. The rate on the 30-year fixed-rate hit its highest level since July 2004. The Producer Price Index for September, which looks for inflation at the wholesale level, jumped by a stunning 1.9 percent - the steepest one-month increase in 15 years. But the core rate, which excludes volatile food and energy prices, rose by an acceptable 0.3 percent, with high energy prices driving up the numbers. In a separate report, Housing Starts in September surged to an annual rate of 2.11 million units - the third highest level on record, while Building Permits rose by a healthy annual rate of 2.19 million. Falling oil prices, the root of current inflation concerns, were another positive for the financial markets.

First-time jobless claims for the week ended Oct. 15 fell for the second consecutive week, coming in at 355,000. The more influential four-week average, which smoothes volatility, slid to 376,000 from 404,500, and continued claims, people collecting benefits for more than one week, edged up to 2.89 million. As of now a total of 478,000 jobs have been lost due to hurricanes Katrina and Rita. The Index of Leading Economic Indicators, which looks at the economy three to six months down the road, slid by a stronger-than-expected 0.7 percent. Two indexes on Manufacturing were split, with the October Philly Fed climbing to 17.3 from 2.2. The index for New York State, however, slid to 12.1 from 15.6.

Mortgage applications rose for the week ended Oct. 14, in spite of higher mortgage rates, according to the Mortgage Bankers Association. Applications to purchase were up 7.3 percent, while refis climbed 4.5 percent. The rate on the 30-year-fixed mortgage (based on zero discount points) is below 5.875 percent, while the 15-year fixed-rate neared 5.5 percent. The introductory rate on the volatile one-year ARM climbed to 4.5 percent.

The last full week of October features several market-moving reports that include new and existing home sales, two surveys on consumer confidence, orders for durable goods and the first look at third-quarter Gross Domestic Product. Any of these reports could spur buying or selling in Treasuries, depending on their strength. If data come in on target, however, it is likely that mortgage rates will hold fairly steady.

Carolyn Siegel, Associate Editor - Interest.com