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Mortgage rates on the rise

Strong economic data, paired with concerns about an overabundance of government and corporate bonds, sent yields on U.S. Treasury securities to their highest levels since early December. Treasury yields move in the opposite direction of prices. The specter of weak demand for government debt and signs of a strengthening economy that could encourage the Fed to keep raising interest rates pushed yields upward. Mortgage lenders, who base rates on Treasury yields, have therefore been forced to begin raising rates. Surprisingly strong demand for durable goods in December put upward pressure on yields, as did a bullish revision to the November report. Durables, which are big-ticket items meant to last more than three years, rose 1.3 percent. Nondefense capital goods expenditures -- a barometer for business spending -- were the strongest since August 2005.

A thriving labor market also provided reason for concern among bond traders. Although weekly first-time jobless claims rose 11,000 to 283,000 for the week ended Jan. 21, the more closely watched four-week average, which smoothes volatility, came in at 288,750. This is its lowest level since July 2000. There also is growing concern in the financial markets that employment is near capacity, with any further increases likely to foster inflation.

Fourth-quarter gross domestic product was weaker than expected, showing only a 1.1 percent increase in economic growth. A brief bond rally ensued, but it was halted when new home sales in December rose by a surprising 2.9 percent to an annual rate of 1.27 million units. December existing-home sales plunged by a steeper-than-expected 1.4 percent to an annualized rate of 6.6 million units. In spite of slow December sales, 2005 set another record for sales of existing homes.

Demand for mortgages continued to grow during the week ended Jan. 21. According to the Mortgage Bankers Associa-tion, applications to refinance posted a big increase, climbing 7.9 percent, while purchase applications rebounded, rising 6.7 percent. The rate on the 30-year fixed-rate mortgage (based on zero discount points) is now well above 5.875 percent, while the 15-year fixed-rate mortgage is nearing 5.5 percent. The rate on the volatile one-year adjustable-rate mortgage is holding at 4.125 percent.

The economic calendar for the week of Jan. 30 is packed with economic news, but the events carrying the most weight will be the employment report for December and the Jan. 31 Fed decision on interest rates (along with its thoroughly dissected explanatory statement). In addition, data on manufacturing, consumer confidence and inflation are set for release. Since Treasuries are sensitive to reports of economic growth, any such signal will likely spur selling. But if the Fed indicates it is almost finished with rate hikes, a rally could send mortgage rates back down.