Mortgage Rate Update for Week Ending 10-28-05

Treasury Sell-Off Keeps Mortgage Rates High

Yields on U.S. Treasury securities soared this week amid constant fear of coming inflation and uncertainty about the approach the newly appointed Fed chairman will take. The nomination of Ben Bernanke, a former Fed governor, to succeed Alan Greenspan in February, created uncertainty among bond traders who wondered about his stance on fighting inflation. Aggressive selling of Treasuries sent yields, which move in the opposite direction of prices, to the highest levels in months, and mortgage rates, which are based on yields, followed.

The week offered a mixed bag of economic data, with positive reports from the housing sector. Existing Home Sales in September matched the August annual rate of 7.28 million units - the second highest level on record. September New Home Sales failed to meet estimates, but rose 2.1 percent to an annual rate of 1.22 million units. In a separate report, consumer confidence slipped to 85.0 in October from the previous 87.5 mark. Concerns about gas prices, the aftermath of the hurricanes and the availability of jobs weighed on respondents and suggested a disappointing holiday season may be in the offing. The report ignited a flurry of buying that soon vanished as fears of inflation cropped up again.

A stronger-than-expected drop in Durable Goods Orders was the only economic news to impact Treasuries. Durables -- big-ticket items meant to last more than three years -- fell 2.1 percent in September and lost 1.0 percent when transportation was excluded. The report, which showed a decline in manufacturing that could slow the economy and ease inflationary pressures, ignited a brief spell of serious buying. Third-quarter GDP rose by a stronger-than-expected 3.8 percent, but inflation remained low. The Employment Cost Index for the third quarter also rose by an inflation-proof 0.8 percent. A poll on consumer sentiment from the University of Michigan growing anxiety, falling to 74.2 in October from 76.9 last month.

The rise in mortgage rates slowed applications, according to the Mortgage Bankers Association. Applications to purchase fell 7.4 percent, while refis were off 8.5 percent during the week ended Oct. 21. The rate on the 30-year-fixed mortgage (based on zero discount points) climbed toward 6.0 percent, while the 15-year fixed-rate rose to just below 5.625 percent. The introductory rate on the volatile one-year ARM fell to just under 4.375 percent.

There are a number of high-profile reports on tap - Personal Incomes/Outlays, two indexes on manufacturing conditions, and Productivity and Costs - and all contain data on inflation. In addition, the Fed meets Nov. 1 and will likely raise short-term interest rates for the 12th straight time. And then October Employment numbers come out on Friday. If signs of inflation crop up they will put pressure on Treasuries, keeping mortgage rates near present high levels. If inflation is benign, rates could retreat a bit.

Carolyn Siegel

carolyn@interest.com