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Mortgage rates edge down

Two days of gains in U.S. Treasury securities allowed lenders, who base their moves on Treasury yields, to edge rates down on many popular products. Buying was spurred by Fed minutes that suggested rate hikes would be coming to an end, an unexpected downturn in manufacturing conditions and a steepening of the yield curve. The minutes from the Dec. 13 meeting of the Fed told traders what they wanted to hear: "The number of additional firming steps required would not be large." Although an end-of-January rate hike is expected, traders hope it will be the last one of the 18-month campaign. This possibility accelerated buying in Treasuries, and especially in two-year notes, which are more sensitive to rate increases. The decline in the two-year note yield, which moves in the opposite direction of price, widened the gap between the yields on the two-year and 10-year notes, nullifying the inversion curve that often predicts economic slowdown.

The employment report for December put slight upward pressure on Treasury yields due to a huge upward revision of November data, which caused concern about future rate hikes. Jobs added in December totaled 108,000 -- half of what was forecast. A bond friendly report from the Institute of Supply Management on December manufacturing conditions came in lower than expected - down to 54.2 from 58.1 in November. New orders and employment also were down, but the "prices paid" component - the one looked at for signs of inflation - plunged to 63 from 74. Inflation is the sworn enemy of bonds, as it erodes their long-term value.

First-time jobless claims tumbled by 35,000 for the week ended Dec. 31 to 291,000-the lowest level since September 2000. Analysts, however, noted holiday volatility could be at least partially responsible for the decrease. The more influential four-week average, which smoothes volatility, slid to 316,750. Other reports included new construction for November, which rose 0.2 percent to a record annualized rate of $1.46 trillion.

For the week ended Dec. 30, mortgage applications were mixed, according to the Mortgage Bankers Association. Applications to purchase fell 3.4 percent, while refinances rebounded, rising by a strong 8.3 percent. The rate on the 30-year fixed-rate mortgage (based on zero discount points) edged down to 5.875 percent, while the 15-year fixed-rate mortgage fell below 5.5 percent. The rate on the volatile one-year adjustable-rate mortgage slid to 4.125 percent.

There are a few market-moving reports on tap, including retail sales for December, the University of Michigan preliminary consumer sentiment report for January, and the all-important producer price index (PPI) for December, which checks for inflation at the wholesale level. Early reports show holiday sales were good. Any inflationary signs from the PPI would also put pressure on Treasuries, which could send mortgage rates up.

Carolyn Siegel

carolyn@interest.com