Mortgage Rate Update for Week Ending 10-14-05

Inflation Fears Send Mortgage Rates Up

Ongoing concerns about inflation and the rate hikes necessary to control it added up to one tough week for U.S. Treasury securities. Bond prices fell sharply and their yields, which move in the opposite direction of prices, are hovering near the highest levels since August 2004. Stirring the cauldron of anxiety over inflation, which erodes the value of fixed-rate assets, are Fed officials who have been relentless in their support for more rate hikes to keep inflation contained. The run-up in yields over the past week has forced mortgage lenders who use yields as a guide to set rates to move them up.There was much anxiety over the Consumer Price Index (CPI) for September, which looks for inflation at the retail level - and it found some. The CPI soared 1.1 percent, the biggest one-month rise in 25 years. But the core, which excludes volatile food and energy prices and is looked at as the true measure of inflation, edged up by a smaller-than-expected 0.1 percent. Retail sales for September climbed by a weaker-than-expected 0.2 percent, but excluding auto sales they rose 1.1 percent. This did not appear to disturb the markets.0The biggest influence on Treasuries was the decline in consumer sentiment - falling to 75.4 from 76.9, when a reading of 80 was expected. This should have been a positive for bonds, but when deeper information regarding the University of Michigan survey circulated it revealed strong concerns about future inflation, which spurred more selling. In a separate report, the U.S. trade deficit August rose to $59 billion from $58 billion the previous month, but it was short of analysts' forecasts. First-time jobless claims fell for the week ended Oct. 7. The decline of 2,000 to 389,000 included 75,000 claims tied to the hurricanes. A total of 438,000 storm-related claims have been filed since the beginning of September. The more influential four-week average, which smoothes volatility, slid to 395,000 from 404,500, and continued claims, people collecting benefits for more than one week, also fell to 2.87 million.Mortgage applications to purchase and refinance slowed for the week ended Oct. 7, as mortgage rates rose, according to the Mortgage Bankers Association. The rate on the 30-year-fixed mortgage (based on zero discount points) is below 5.875 percent, while the 15-year fixed-rate neared 5.5 percent. The introductory rate on the volatile one-year ARM climbed to 4.5 percent.

Reports on manufacturing and housing are coming up, but the focus will be on the ProducerPrice Index (PPI), which checks for inflation at the wholesale level. This report will be key, as producers generally experience inflationary pressures before the consumer does. This report, due Tuesday, could shape trading for the remainder of the week. Until then it is likely that mortgage rates will remain near present high levels.