Worries that the Federal Reserve will have to keep raising interest rates to fight inflation drove the prices of U.S. Treasury bonds down this week. But Friday's weak employment report sent them soaring.

Yields, which move in the opposite direction of prices, had b. ]]> Mortgage rates tick back up

Worries that the Federal Reserve will have to keep raising interest rates to fight inflation drove the prices of U.S. Treasury bonds down this week. But Friday's weak employment report sent them soaring.

Yields, which move in the opposite direction of prices, had been climbing all week, but the post-jobs-report rally sent them to their lowest levels in more than two weeks. Mortgage lenders use yields as a guide to set rates and they nudged them up slightly earlier in the week.

Only 75,000 jobs were added to non-farm payrolls in May - 100,000 shy of expectations. And hourly earnings rose a scant 0.1%, giving traders a fresh reason to hope for a pause by the Fed.

The release of the minutes of the Fed's May 10 meeting also moved Treasuries, but in the opposite direction. The financial markets were looking for hints that the Fed would pause its credit-tightening campaign at its June 28-29 meeting. Instead, the Committee noted inflation was greater than expected and that higher energy costs might pass through to the consumer, disappointing traders.

The holiday-shortened week began with a drop in consumer confidence. It declined to 103.2 from the previous multi-month high of 109.3, but had only limited effect on bonds.

The holiday-shortened week began with a drop in consumer confidence. It declined to 103.2 from the previous multi-month high of 109.3, but had only limited effect on bonds.

Manufacturing data were mixed, with the Chicago Purchasing Managers Institute reporting that May business conditions rose to 61.5 from 57.1, but prices paid declined. On the other hand, the Institute of Supply Management, which provides an index on national manufacturing conditions, reported a drop to 54.4 in May, but a rise in prices paid -- a key inflation indicator.

First-quarter productivity was revised upward to 3.7 percent from the previous 3.2 percent, while both fourth-quarter and first-quarter labor costs were revised downward, presenting a benign inflation picture.

First-time unemployment claims for the week ended May 27 rose by 7,000 to 336,000 - the highest level since October, and the four-week average matched its October high, coming in at 333,500. In a separate report, construction spending in April fell for the first time in 10 months, declining 0.1 percent, with private residence construction at its lowest level since January 2004.

Mortgage applications fell again during the week ended May 26. While purchase applications were off only 0.2 percent, refinances declined by 4.8 percent, according to the Mortgage Bankers Association. The 30-year fixed-rate mortgage (based on zero discount points) climbed back to 6.72 percent, while the 15-year fixed-rate mortgage edged up to 6.32 percent. The rate on the five-year, adjustable-rate mortgage crept up to 6.29 percent.

There is little in the way of economic reports due next week. First-time unemployment claims will be out Thursday, preceded only by April consumer credit data. A report on wholesale inventories for April is also due. Friday features the U.S. trade deficit for April, which can impact gross domestic product. And separately, import and export price indexes for May will be watched for signs of inflation.

Due to the huge slide in Treasury yields on Friday, it is possible that mortgage rates will edge down over the weekend and into Monday.

Carolyn Siegel

carolyn@interest.com

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