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Treasuries rally mortgage rates fall

Benign news on inflation and safe-haven buying due to a couple of down days on Wall Street led to strong rallies in U.S. Treasury securities. Hints of a strengthening job market and growth in the manufacturing sector, however, tamed buying and nudged yields, which move in the opposite direction of prices, back up. During the week, mortgages rates, which are based on Treasury yields, edged down on most products. Two key inflation indicators, the producer and consumer price indexes for December, showed inflation at both the wholesale and retail levels remains contained. Producer prices increased sharply, rising 0.9 percent - twice what was forecast. But the core rate, which excludes volatile food and energy prices, rose only 0.1 percent, and this is the one the Fed watches. Consumer prices fell 0.1 percent, but the core rate came in on target - up 0.2 percent. This, however, pushed the core rate for 2005 to 2.2 percent, which is near the top of the Fed's comfort zone.

Industrial production in December rose 0.6 percent, beating estimates, while capacity utilization -the percentage of mines, utilities and factories in operation - hit 80.7, the highest reading in more than five years. The New York Empire State index of January manufacturing conditions slid to 20.1 from a revised 26.3, while the more influential Philadelphia Fed index dipped to 3.3 in January from 5.8 in December.

December housing starts plunged 8.9 percent to an annualized rate of 1.93 million units. While starts on multifamily construction rose, single-family starts slid, providing further signs of a cooling housing market. Building permits declined to a still-strong annual rate of 2.07 million.

First-time jobless claims set multi-year records for the week ended Jan. 14. Claims fell to 271,000 -- the lowest level since April 2000, while the more-closely watched four-week average slid to 311,500, the lowest level since October 2000. Continued claims, representing people collecting unemployment benefits for more than one week plummeted to 2.53 million - a five-year low.

Applications to refinance remained strong, climbing 9.9 percent for the second straight week, according to the Mortgage Bankers Association. However, purchase applications for the week ended Jan. 13 fell 3 percent. The rate on the 30-year fixed-rate mortgage (based on zero discount points) is at 5.875 percent, while the 15-year fixed-rate mortgage slid to just above 5.375 percent. The rate on the volatile one-year adjustable-rate mortgage rose to 4.25 percent.

Upcoming economic reports are few, but they could impact the markets. The advance look at fourth-quarter gross domestic product would likely be the most influential. New and existing home sales for December are also on tap along with durable goods orders.

If economic growth and inflation remain in check, buying in Treasuries should remain steady. This would allow lenders to hold mortgages rates near present levels.