Mortgage Rate Update for Week Ending 09-30-05

Inflation Fears Send Mortgage Rates Up

In spite of some economic reports that would normally support U.S. Treasury securities, there were more sellers than buyers in the bond pits. Concerns about inflation, which erodes the value of fixed rate assets, kept the pressure on, as did the specter of more Fed rate hikes. Escalating oil prices in the wake of the hurricanes are also being regarded as inflationary. The resulting pattern of steady selling, lightened by brief intermittent rallies, kept prices of Treasuries down and their yields, which move in the opposite direction of prices, up. Higher yields forced lenders to edge rates up on most mortgage products.

Existing home sales, which account for roughly 85 percent of all home sales, rose 2 percent to an annual rate of 7.29 million units in August - the second highest level on record. New home sales in August painted a different picture, plunging 9.9 percent to an annual rate of 1.24 million units - down from a revised 1.37 million units in July. A sharp drop in Consumer Confidence in September left Treasuries unfazed, as they focused on upcoming rate hikes. Confidence slid to 86.6 from 105.6 in August - the biggest one-month decline in 15 years. The University of Michigan's consumer sentiment survey for September also dipped, coming in at 76.9 versus 89.1 in August.

Durable goods orders rebounded in August, rising 3.3 percent. This key indicator of manufacturing activity and business spending raised the yellow flag on inflation. First-time jobless claims for the week ended Sept. 23 fell by 79,000 to 356,000. The final reading on second-quarter Gross Domestic Product remained at 3.3 percent. However, the personal consumption expenditure index within the report, a key inflation gauge, rose to 1.7 percent from 1.6 percent, negatively impacting bonds. The Chicago PMI index on business conditions jumped to 60.5 - well above the 49.2 posted in August. In a separate report, Personal Spending in August fell 0.5 percent, while income was down 0.1 percent. Consumer inflation, however, rose 0.5 percent (core inflation rose 0.2 percent) raising more concerns for bond traders.

Applications to purchase and refinance slowed for the week ended Sept. 23, according to the Mortgage Bankers Assn. The rate on the 30-year-fixed mortgage (based on zero discount points) climbed well above 5.625 percent, while the 15-year fixed-rate crept up to 5.25 percent. The introductory rate on the volatile one-year ARM rose above 3.875 percent.

Upcoming economic reports are few, but two are highly influential. The ISM index of manufacturing conditions for September can have major impact on the markets, but it can't match the clout of the September employment report, due Friday. Otherwise, there is little on tap with market-moving capability. However, the sell-off on Friday (9/30) will likely send mortgage rates higher over the weekend, but they should hold near recently elevated levels early in the week.

Carolyn Siegel

carolyn@interest.com