Mortgage rates continue climb, Treasury recovery brings stability

Mortgage rates edged up during the week, but U.S. Treasury securities put together a rally that sent Treasury yields down and mortgage rates moved back to levels of last week.

Treasuries have been beaten down over the past six weeks due to a booming stock market and fears that an economic rebound would spur inflation. Treasury traders finally said "enough" and began nibbling at the oversold issues. A positive response to the Treasury Department's refinancing auction of 5- and 10-year notes also helped the cause.

Mortgage lenders, who have been forced to raise rates in line with the upswing in Treasury yields, got some relief when Treasuries stabilized.

The 30-year fixed-rate mortgage (based on zero discount points) held at just under 6.125 percent, while the 15-year fixed-rate mortgage rose to 5. 5 percent. The introductory rate on the volatile one-year adjustable-rate mortgage also moved up to 4 percent.

The recent surge in mortgage rates continues to affect refinancing. According to the Mortgage Bankers Association, refis are down 60 percent since May, but home purchases remain strong. The purchase index for the week ending Aug. 1 reached its second highest level on record.

The financial markets responded negatively to a huge rise in service sector conditions. The ISM index rose to 65.1 -- the highest level since the survey began six years ago. Factory orders posted the sharpest rise in three months. Likewise, wholesale sales in June rose 1.5 percent -- their best level in a year, and first-time unemployment claims held under 400,000 for the third straight week.

Stocks have been trading in a narrow range on worries that sliding interest rates will slow economic recovery while Treasury traders fear that economic recovery will wake inflationary pressures, which is bad news for fixed-rate assets.

Several market-moving economic reports are on the docket with retail sales, the producer and consumer price indices, industrial production, consumer sentiment and first-time jobless claims among the most influential. In addition, the Fed will meet Tuesday to discuss interest rates, but it is not expected to move. Although the financial markets have veered from typical reactions to news lately, positive reports could pressure Treasuries, leveling off mortgage rates.

Bill Steele is financial editor of Interest.com -- a national publisher of mortgage rates and information.

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