Article Archive Article PDF

Two-Day Treasury Rally Sends Mortgage Rates Down

With little on the docket in the way of economic news traders of U.S. Treasury securities had to look elsewhere for direction. And they found some. Encouraging words from a preeminent bond fund manager sent Treasuries on a two-day rally that resulted in yields, which move in the opposite direction of prices, plunging. In fact, the yield on the benchmark 10-year note, which lenders use as a guide to set mortgage rates, dipped below the 4.0-percent mark for the first time in 10 days. The drop in yields allowed mortgage lenders to edge rates back down on most mortgage products. The PIMCO bond fund manager sparked the bond rally by stating that he felt the Fed would halt its rate-hike campaign after the August meeting, when the target fed funds rate would hit 3.5 percent. And if this weren't enough, he added that the Fed could begin cutting rates by the end of the year.

A stronger-than-forecast dip in first-time unemployment claims for the week ended June 17 ignited moderate selling in Treasuries. Claims fell by 20,000 to 314,000 - the lowest total in two months - and raised the chances for a strong June employment report on July 8 that could keep the Fed moving along with its rate-hike agenda.

A stronger-than-expected report on Durble Goods Orders turned out to be a plus for bonds as most of the 5.5 percent increase in May was due to orders for civilian aircraft. Excluding transportation, durables fell 0.2 percent -- the third decline in the last four months.

Existing home sales in May were just shy of expectations. May sales edged down by 0.7 percent to an annualized 7.15 million units from April's record of 7.18 million. But New Home Sales in May rose 2.1 percent to an annual rate of 1.298 million. The previous three months, however, were downwardly revised.

The rise in mortgage rates for the week ended June 17 took its toll on home loan applications, according to the Mortgage Bankers Association. Applications to purchase fell 9.4 percent, while refis were off 13.2 percent. The rate on the 30-year-fixed mortgage (based on zero discount points) is back down to 5.375 percent, while the 15-year fixed-rate is well below 5.0 percent. The introductory rate on the volatile one-year adjustable-rate mortgage is under 3.375 percent.

June ends with a wealth of economic reports, but they will be trumped by the Fed's June 30 decision on interest rates. Although a 25-basis-point increase is expected, traders will focus on the accompanying statement to determine if it suggests further credit tightening is in the offing. Key reports on manufacturing, consumer confidence, personal spending and the final revision of first-quarter GDP are all scheduled. The June employment report, normally released on the first Friday of the month, was pushed back to July 8 after the Independence holiday weekend. If the majority of reports come in on forecast, mortgage rates could remain near present levels.

Carolyn Siegel

carolyn@interest.com