Mortgage Rate Update for Week Ending 05/13/05

Mortgage Rates Edge Down in Spite of Volatility

It's been an up and down week for U.S. Treasury securities, which began on the downside - a fallout from the bullish April employment report released May 6. Visions of slower economic growth were erased by the addition of 274,000 new jobs, and replaced by the threat of more aggressive rate hikes by the Fed. Bond-friendly economic news brought buyers back to Treasuries and yields, which move in the opposite direction of prices, edged back down - although nowhere near the low levels reached prior to the employment report. There was also some safe-haven buying as investors deserted hedge funds and fled to government issues. As a result, Treasury yields fell even further on Friday, allowing mortgage lenders who base their rates on yields to edge them down on some products.

Treasuries got huge boosts from unexpected sources. Their biggest rally of the week was the result of safe-haven buying resulting from weak corporate news and bearish economic outlooks that sent stocks plunging. And the U.S. trade deficit in March posted a six-month low of $55 billion, when analysts were expecting an increase to $62 billion. This strengthened the dollar and encouraged buying in dollar-denominated investments, such as government bonds. A sharp decline in consumer sentiment, as reported by the University of Michigan preliminary May survey, also spurred buying in Treasuries. The index fell to 85.3 when analysts were expecting an increase to 88. Future expectations caused the decline.0

But buying halted when retail sales in April doubled expectations, rising by an incredible 1.4 percent - the best showing since September. In addition, the core rate, which excludes auto sales, showed an impressive 1.1-percent gain. Signs that the consumer is still buying and the economy continues to roll ignited selling in Treasuries. Upbeat retail sales overshadowed the fact that first-time unemployment claims rose by 4,000 to 340,000, when a decline to 327,000 was forecast.

Attractive mortgage rates spurred mortgage activity for the week ended May 6, according to the Mortgage Bankers Association. Applications to purchase rose 9.4 percent, and refinancings climbed 9.8 percent, but accounted for only 35 percent of mortgage activity. The rate on the 30-year-fixed mortgage (based on zero discount points) is waffling between 5.625 percent and 5.50 percent, while the 15-year fixed-rate slipped to 5.125 percent. The introductory rate on the one-year adjustable-rate mortgage is at 3.50 percent.

There are nine economic reports due the week of May 16, with the most important of these being the Consumer Price Index for April, as it monitors inflation at the retail level and can have a big impact on Treasuries. Releases on housing and manufacturing could also be factors in market activity. Mortgage rates should edge down over the weekend in response to Friday's rally, and if inflation appears under control next week and other reports come in on target, rates should hold near lower levels.