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Treasury Yields Volatile, Mortgage Rates Steady

U.S. Treasury securities weathered a couple of bad days and reveled in a couple of good ones, in spite of a dearth of economic news. This week's key report showed productivity galloping ahead while costs remained low - good news for inflation watchers who are wary that rising wages will unleash inflationary pressures. This, and an increase in first-time unemployment claims, rallied Treasuries on the hope the Fed will slow or halt its rate-hike program early in 2006. On the other hand, concerns about the outcome of the Fed's Dec. 13 meeting and nagging hints of inflation capped Treasury prices. Treasury yields, which move in the opposite direction of prices, were up one day and down the next, leaving mortgage rates unchanged. The revised report on third-quarter productivity stunned the financial markets, rising by an upwardly revised 4.7 percent, while costs dipped to a negative 1 percent. This scenario allows manufacturers to increase output without raising prices - the perfect anti-inflation data. Inflation is the archenemy of bonds, as it erodes their long-term value. The other market-mover was the claims report for the week ended Dec. 3. First-time claims jumped by 6,000 to 327,000 - far more than the forecast for a decline to 317,000. But the more telling four-week average, which smoothes volatility, dipped to 322,500 while continued claims -those collecting benefits for more than one week - fell to 2.6 million.

The Institute of Supply Management November index on non-manufacturing conditions, i.e., the service sector, edged down to 58.5, but increases in employment and new orders, as well as the impact of higher freight costs due to rising oil prices, initiated selling in the Treasury markets. Factory Orders for October looked strong, rising 2.2 percent, but demand for aircraft was largely responsible for that number. When transportation was factored out, orders were up a tepid 0.6 percent. Orders for non-defense capital goods rose 1.4 percent, indicating business spending is healthy.

Mortgage applications rebounded during the week following Thanksgiving. According to the Mortgage Bankers Association, purchase applications rose 4 percent, while refis climbed 7.6 percent. The rate on the 30-year fixed-rate mortgage (based on zero discount points) remains just above 6.0 percent, while the 15-year fixed-rate mortgage is holding below 5.625 percent. The rate on the volatile one-year adjustable-rate mortgage remained at 3.875 percent.

The drought in economic news ends with a number of key reports focusing on retail sales, inflation, the U.S. trade deficit and a trio of indicators on the manufacturing sector for both December and November. As if this weren't enough for the markets to digest, the Fed will announce its decision on interest rates. Investors are hoping for insight into future moves, and a hint that credit tightening will be winding down. If the reports show steady but not aggressive growth and low inflation, and the Fed suggests a slowdown in rate hikes, Treasuries would rally and mortgage rates would hold or edge down. Of course, the opposite could also be true if reports beat estimates.