Interest rates continue sharp climb; refinance applications show decline

The Federal Open Market Committee started the sell-off in U.S. Treasury securities in June when it cut fed funds by only 25 points, and this week the Fed further ignited selling by standing pat on its neutral bias, and failing to offer a plan to shore up Treasuries.

A huge sell-off ensued that sent the yield on the 10-year note, which mortgage lenders use as a guide to set rates, to its highest level in more than a year. Lenders raised their mortgage rates, which had edged down, on most of their products.

The 30-year, fixed-rate mortgage (based on zero discount points) is just over 6.25 percent, while the 15-year, fixed-rate mortgage is slightly below 5.625 percent. The introductory rate on the one-year, adjustable-rate mortgage is at 3.875 percent.

The steep rise in mortgage rates has had a dramatic effect on refinancing. According to the Mortgage Bankers Association, refis were down 20 percent for the week ended Aug. 8, and they are off 67.5 percent since May. Although home purchases were down 10 percent last week, they remain relatively strong.

Selling in Treasuries and the attendant rise in yields, which move in the opposite direction of price, is also pressuring Wall Street, as investors fear higher interest rates could stifle investment and slow economic recovery.

A strong 1.4 percent jump in July retail sales worried Treasury traders who see economic recovery bringing inflation that would erode fixed-rate assets. The producer price index in July, which checks for inflation at the wholesale level, rose by an expected 0.1 percent. The core rate, which eliminates volatile food and energy prices, rose 0.2 percent, a touch higher than expected.

Although first-time unemployment claims rose, they remain below the key 400,000 mark for the fourth straight week, indicating expansion in the labor market. The U.S. trade deficit shrank, thanks to a big increase in exports.

There are few key economic reports scheduled, which will leave investors looking elsewhere for direction. This scenario will provide little relief for Treasury yields and for mortgage rates, which will likely remain at elevated levels for the foreseeable future.

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

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