Fixed mortgage rates fall
'Numbers spoke louder than words this week as long-term mortgage rates fell.'
June 2006
Ben Bernanke, chairman of the Federal Reserve, caused bond yields to rise when he implied that the central bank might raise short-term interest rates again. But in the mortgage world, Bernanke's words were considered just that -- mere words, subject to interpretation.
The thing that moved mortgage rates came a few days before Bernanke's speech, in the May employment report. It needed little interpretation. Job growth was weak, when Wall Street had expected it to be strong. Bond yields tumbled, and long-term mortgage rates followed.
The benchmark 30-year fixed-rate mortgage fell 3 basis points to 6.69 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.35 discount and origination points. One year ago, the mortgage index was 5.61 percent; four weeks ago, it was 6.67 percent.
The 15-year fixed-rate mortgage fell 1 basis point to 6.31 percent. The 5/1 adjustable-rate mortgage rose 3 basis points to 6.32 percent.
The rate-moving trio
Mortgage rates tend to move up and down with Treasury yields, which in turn move up and down in reaction to a lot of economic factors. Lately, Treasury yields have been especially sensitive to three of these: the Consumer Price Index, the monthly employment report and decisions of the Federal Reserve's rate-setting committee. The latter two came into play in the past week.
First came the May employment report, in which the Labor Department said that the economy grew by a net 75,000 jobs last month. That's fine if you're one of those 75,000 people, but investors were dismayed, because they had expected the number to be around 170,000. Wall Street expected the employment report to rumble like a Harley, but it putt-putted like a Vespa.
'Dear Mr. Bernanke: You wanted weakness, you got weakness,' wrote economist Joel Naroff, adding that job growth in May was 'extremely disappointing.' He said it was ominous that the preliminary estimates for job growth in March and April were revised downward.
Given the anemic job growth, it's no surprise that hourly income barely budged upward and the average workweek was six minutes shorter. The employment report painted a portrait of a modestly growing economy in which inflation shouldn't be much of a threat. Investors concluded that the odds were against another Fed rate increase at the end of this month. The yield on the 10-year Treasury note fell 11 basis points, hinting at a corresponding drop in the 30-year fixed mortgage rate.
Inflation concerns reappear
Three days later, Bernanke spoke in Washington at the International Monetary Conference, and he complained about inflation. He said core inflation -- consumer prices minus volatile food and energy costs -- might be 'at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of long-run growth.' He called recent price trends 'unwelcome developments.'
Wall Street saw this as a signal that the Fed is likely to raise the federal funds rate again June 29. The yield on the 10-year Treasury rose only a couple of basis points, because the long-term outlook for inflation is benign. But the five-year Treasury jumped, taking back the drop that came in reaction to the employment report.
Source: Mortgages.co.uk
