Mortgage Rate Update for Week Ending 11-04-05

Yields on U.S. Treasuries continued to climb as the Federal Open Market Committee raised overnight lending rates for the 12th time since June 30, 2004. Although the 25-basis-point rate hike was expected, bond traders were hoping for some indication that rate increases would be coming to an end. They didn't get it, as the Fed held to its "measured pace" mantra. The present series of rate increases has been implemented to stamp out inflation, which has been rearing its head especially due to high oil prices.

Recent reports also suggest that inflationary pressures are still of major concern, igniting more selling. Inflation erodes the value of fixed-rate assets. Treasury yields, which move in the opposite direction of prices, hit their highest levels in months and mortgages rates moved up with them.The week began quietly enough with the Chicago PMI index on October business conditions coming in at a higher-than-expected 62.9. But the numbers inside the report were benign. The same could not be said for the ISM report on October manufacturing conditions, which edged down to 59.1 versus the previous reading of 59.4. However, the prices paid' index, an inflation indicator, soared to 84 from 78 its highest level since May 2004. This and the Fed rate hike brought out sellers, and they haven't stopped selling since.

Personal Income and Spending in September rose 1.7 percent and 0.5 percent, respectively. The core inflation index within the report, however, came in at the high end of the Fed's comfort zone. Third-quarter Productivity and Costs were friendlier, as productivity climbed 4.1 percent. But costs fell 0.5 percent, easing concern about wage inflation. And the ISM index on the service sector jumped to 60 in October from 53.3. Finally, yields downticked when October nonfarm payrolls proved weaker than expected, but a jump in hourly wages kept inflation concerns on the radar screen.

Higher mortgage rates have slowed mortgage activity, according to the Mortgage Bankers Association. For the week ended Oct. 28 purchase applications fell 6.2 percent, while refis were down 2.6 percent. The rate on the 30-year-fixed mortgage (based on zero discount points) rose above the 6.0 percent level for the first time since June 2004, while the 15-year fixed-rate held just below 5.625 percent. The introductory rate on the volatile one-year ARM edged down to 4 percent.