Weekly mortgage rate update for 3-31-06

Mortgage rates begin to climb

Another Fed rate hike with more to follow and signs of inflation in the gross domestic product stoked a firestorm of selling in bonds. Traders unloaded U.S. Treasury securities, sending prices plunging and yields, which move in the opposite direction, soaring. Fear of inflation erodes the value of fixed-rate assets over time. The yield on the benchmark 10-year note, which is used as a guide to set mortgage rates, climbed to its highest level in almost two years, forcing lenders to begin edging rates upward on most popular mortgage products.

The expected Fed rate hike did not rattle Treasuries as much as the accompanying statement, which verified inflation is of concern. The Fed noted that "some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance," disappointing traders who were hoping for a sign that rate increases would soon end. Now it looks like there will be a rate increase in May and perhaps in June, as well.

The final revision of fourth-quarter gross domestic product, or GDP, edged up to an expected 1.7 percent, but core consumer inflation - one of the Fed's favorite inflation indicators -- hit 2.4 percent, spurring another round of selling. Not only was this up from the previous 2.1 percent reading, but also it is well above the 2-percent "comfort zone" ceiling associated with the Fed.

Virtually all reports this week pointed to economic strength. Although the numbers were somewhat skewed due to the introduction of seasonal factors, first-time unemployment claims for the week ended March 25 fell for the second straight time after three weeks of increases. Claims slid by 10,000 to 302,000, while the more closely watched four-week average, which smoothes volatility, dipped to 310,750. Consumer confidence also hit its highest level since May 2002, rising to 107.2. Confidence regarding respondents' present situation soared, but future expectations were more subdued.

Mortgage applications were mixed for the week ended March 24. According to the Mortgage Bankers Association, purchase applications rose 2.7 percent, while refis fell 1 percent. The rate on the 30-year fixed-rate mortgage (based on zero discount points) is well above 6.125 percent, while the 15-year fixed-rate mortgage is just under 5.75 percent. The rate on the five-year, adjustable-rate mortgage remained is just below 5.75 percent.

The first week of April is light on economic news, but Friday's March employment report will fill the gap, and if it comes in stronger than expected Treasuries would likely begin selling again. The week begins with the ISM index of manufacturing conditions, which can also be a market mover, as the manufacturing sector is a key economic component. Also on tap, the ISM index on the service sector, weekly unemployment claims and wholesale inventories for February. The huge increase in Treasury yields will likely send mortgage rates up and keep them at new higher levels.

Carolyn Siegel

carolyn@interest.com