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Mortgage rates creeping up

Inflation concerns and disappointment in the Fed's statement on rate hikes, as well as nervousness about a flood of bond issues kept pressure on U.S. Treasury securities. Sellers outnumbered buyers and Treasury yields, which move in the opposite direction of prices, marched higher. Since lenders use yields as a guide for setting rates, many have already repriced their rates upward. Alan Greenspan passed the torch to Ben Bernanke, who was sworn in as the chairman of the Federal Open Market Committee on Feb. 1. The day prior, however, the Fed increased short-term interest rates by another 25 basis points and left the door open for future hikes, stating: “Some further policy firming might be needed to keep...sustainable economic growth and price stability roughly in balance.” Disappointed bond traders were hoping the Fed would signal an end to the current 14-meeting rate hike program.

And then the January employment report hit. While jobs added to nonfarm payrolls were weaker than expected at 193,000, hourly wages rose by 4 cents to $16.41 an hour. This increase is regarded as inflationary and ignited aggressive selling in bonds. The leap in wages, it is feared, will keep the Fed on its credit-tightening path in order to rein in inflation. The unemployment rate also dropped to 4.7 percent, signaling a healthy labor market that worries traders.

The ISM index, which measures manufacturing conditions, edged down to 54.8 in January, but showed prices-paid rising slightly, a hint of inflation down the road. Fourth-quarter productivity and costs also raised a warning flag, with productivity diving into negative territory with a 0.6 percent decline. Unit labor costs jumped 3.5 percent, the biggest increase in 2005. The markets watch labor costs for early signs of inflation.

First-time unemployment claims, for the week ended Jan. 28, dropped to 273,000. The more closely watched four-week average, which smoothes volatility, hit its lowest level since June 2000. In a separate report, construction spending climbed 1 percent, eclipsing forecasts for a 0.1 percent gain. This indicator generally goes unnoticed, but the markets responded to the possibility that the once-booming housing market may not be ready to lie down.

Mortgages applications fell for the week ended Jan. 28. The Mortgage Bankers Association said applications to refinance were off 1.5 percent, while purchase applications dropped by a whopping 8 percent. The rate on the 30-year fixed-rate mortgage (based on zero discount points) climbed to just below 6 percent, while the 15-year fixed-rate mortgage is now above 5.5 percent. The rate on the volatile one-year adjustable-rate mortgage held at 4.125 percent.

The economic calendar is barren for the next several days, with only the U.S. trade deficit for December, wholesale and business inventories and first-time unemployment claims due. This will leave Treasuries to focus on auctions of three- and 10-year notes and the revival of the 30-year bond. Traders will monitor sales to foreign banks and this will guide trading for the week.

If demand is strong, Treasuries should rally. But signs of weakness will likely spur selling. In either case, mortgage rates should hold near present higher levels.

Carolyn Siegel

carolyn@interest.com