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Mortgage rates remain higher

There was little in the way of economic news to move U.S. Treasury securities, so they took their lead from former Fed Chairman Alan Greenspan and auctions of three- and 10-year notes and the 30-year bond, which was successfully reintroduced on Thursday and rallied Treasuries on Friday. The financial markets also monitored the inversion of the yield curve, which can indicate economic weakness or even recession. Although Treasury yields, which move in the opposite direction of prices, were somewhat volatile, they evened out, allowing mortgage rates to remain close to those of last week. Treasuries sold on word that Alan Greenspan had offered an upbeat outlook for the equity markets to investment bankers at a major brokerage. Bull-driven stocks generally result in selling in Treasuries as investors move their funds to Wall Street in a quest for bigger profits. Investors also watched the yield curve, which is the difference between the yield on short- and long-term notes. When the yield on the two-year note is higher than that of the 10-year note this so-called inversion often indicates future economic woes, but many analysts believe changes in today's economic climate have all but erased this possibility.

First-time unemployment claims, for the week ended Feb. 4, rose to 277,000 -- far below estimates. The four-week average, which smoothes volatility, fell to 276,000 -- the lowest point since April 2000. The report alerted bond traders to growing labor market tightness, which could lead to wage increases and inflation down the road. Inflation worries investors, as it erodes the value of long-term fixed-rate assets such as bonds.

January wholesale inventories and sales were both up by 1 percent. A buildup in autos and drugs was responsible for stronger-than-expected inventories. The inventory-to-sales ratio, however, remains tight, which bodes well for manufacturing but worries traders about stronger economic growth.

Mortgages applications edged down for the week ended Feb. 3, with purchase applications falling 2.4 percent. Refis posted a slim 0.2 percent increase, according to the Mortgage Bankers Association. The rate on the 30-year fixed-rate mortgage (based on zero discount points) remains just below 6 percent, while the 15-year fixed-rate mortgage is now well above 5.5 percent. The rate on the volatile one-year adjustable-rate mortgage climbed to 4.5 percent.

After a drought of economic news, a number of releases will flood the markets. Most important of these for Treasuries is the January producer price index, which checks for inflation at the wholesale level. Escalating prices will spur selling, but a benign reading could attract buyers. Also due for January: retail sales, industrial production and capacity utilization, housing starts and building permits, and a preliminary report on consumer sentiment for February.

If the reports come in on target, Treasury prices and yields should remain fairly stable. This would allow mortgage rates to do the same.

Carolyn Siegel

carolyn@interest.com