The Fed disappointed the U.S. Treasury markets, which rallied prior to the decision on interest rates on the hope that a pause in the rate-hike program would be forthcoming. Instead, the Fed left the door open for more increases. Earlier gains were erased and yields. ]]> Mortgage rates dip then rise

The Fed disappointed the U.S. Treasury markets, which rallied prior to the decision on interest rates on the hope that a pause in the rate-hike program would be forthcoming. Instead, the Fed left the door open for more increases. Earlier gains were erased and yields, which move in the opposite direction of prices, returned to four-year highs. Pre-Fed buying in Treasuries and a lack of early-week economic news allowed mortgage lenders who base their rates on yields to edge them down on some products, but the dip is unlikely to last.

In its statement the Fed concluded, "... some further policy firming may yet be needed to address inflation risks but emphasized that the extent and timing of any such firming will depend ... on incoming information." The specter of further rate hikes, a small drop in first-time jobless claims, a weak response to a 10-year note auction, surging import prices and a narrowing of the trade gap, which will add to first-quarter GDP, ignited heavy selling of Treasuries and pushed the yield on the 10-year note up to 5.18 percent.

The U.S. trade deficit in March shrank to $62 billion, its lowest level since August, due to record exports. But in a separate report, import prices in April rose 2.1 percent, due to an 11.5 percent spike in petroleum products, stoking fears of inflation - the archenemy of bonds, since it erodes their value.

The University of Michigan's preliminary consumer sentiment survey for May showed gas prices are hitting home. The index dropped to 79 from 87.4 just two weeks ago, with the price of gas and a softening labor market cited as main concerns. A 0.5 percent increase in April retail sales - due mostly to gasoline prices -- had little impact.

First-time unemployment claims for the week ended May 8 fell by 1,000 to 324,000. The total would have been significantly lower were it not for a partial government shutdown in Puerto Rico that accounted for almost 20,000 claims. The more closely watched four-week moving average, which smoothes volatility, climbed to 317,250.

Mortgage applications were down for the week ended May 5. Purchase applications slid 3.9 percent, while refinances were off 8.8 percent, according to the Mortgage Bankers Association. The 30-year fixed-rate mortgage (based on zero discount points) eased back to 6.375 percent, while the 15-year fixed-rate mortgage edged neared 5.875 percent. The rate on the five-year, adjustable-rate mortgage slid to 5.875 percent.

Multiple reports are due this week, with data on inflation, manufacturing and housing all capable of moving the markets. The producer and consumer price indexes for April could impact Treasuries, as they look for inflation at the wholesale and retail levels. And regional reports on May manufacturing conditions, as well as industrial production could be key. Housing starts and building permits will also be in focus, as they offer a first glimpse into the April housing market.

With Treasuries selling due to concerns about future rate hikes and yields spiking, it is likely that mortgage rates will begin edging back up.

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