Weekly mortgage rate update for 4-21-06

Mortgage rates edge higher

The yield on the benchmark 10-year note fell below 5 percent on signs of benign inflation and positive news from the Fed. But the good news was short-lived and Treasury yields and mortgage rates, which move in sync with yields, began to creep up again. Fear of inflation, which robs fixed-rate assets, such as bonds, of their value was quelled and then caught fire again. Mortgage rates, which temporarily edged down, are once again nearing recent high levels.

The financial markets celebrated the core rate of the producer price index, or PPI, for March, which climbed only 0.1 percent - its smallest gain since November. The core rate, which excludes volatile food and energy prices, is closely watched for signs of inflation at the wholesale level. The PPI rose 0.5 percent, but higher gas prices were blamed for the increase. The markets continued in rally mode with the release of the minutes from the Fed's March 28 meeting that suggested its credit-tightening cycle was near the end. Nevertheless, it is expected that the Fed will increase rates one more time at the May 10 meeting.

Also supporting Treasuries was a drop in March housing starts and building permits. Starts fell almost 8 percent to an annual rate of 1.96 million units, with declines reported in all geographic regions. Building permits slid 5.5 percent to an annual rate of 2.06 million.

The rally came to an abrupt halt when the consumer price index, or CPI, for March indicated inflation is making an impact. Although the CPI rose by an inline 0.4 percent, the core rate jumped 0.3 percent from 0.1 percent, setting off inflation alarms. Traders feared high energy prices are behind the overall increases. Selling further accelerated when San Francisco Fed president, Janet Yellen, expressed agreement with that conclusion. Aggressive selling sent yields, which move in the opposite direction of prices, back up.

In separate reports, there were two divergent views on manufacturing, with the New York index sliding and showing price stability. The Philly Fed index on April conditions, however, rose slightly but revealed a huge increase in the prices-paid component - a sign of coming inflation.

Mortgage applications continue to decline as rates rise. For the week ended April 14, purchase applications fell 2.5 percent, while refis slid 0.4 percent, according to the Mortgage Bankers Association. The 30-year fixed-rate mortgage (based on zero discount points) is moving back up toward 6.5 percent, while the 15-year fixed-rate mortgage is closing in on 6.125 percent. The rate on the five-year, adjustable-rate mortgage is holding between 6 percent and 6.125 percent.

April ends with a bang. Of the several key reports due, nothing will top the importance of the advance first-quarter gross domestic product data, which is a broad look at the nation's economic health. Strong growth would likely have a negative effect on bonds. Existing and new home sales for March also are on tap, along with two consumer confidence reports and updates on the manufacturing sector. If reports show continuing economic strength, they will weigh on Treasuries and keep mortgage rates pushing higher.