Mortgage rates continue to rebound

Since the Fed cut rates by 25 basis points more than a week ago, selling in U.S. Treasuries has been relentless, leading to a tough week for the government issues. Even weak economic news, which generally supports buying in government issues, had only a short-term positive effect.

Wall Street seems to be convinced -- at least right now -- that the economy is going to recover in the second half of 2003 and optimism on the street prevails, even in the face of so-so reports. Rising stock prices and the conviction that they will go higher has provided little reason to buy Treasuries. As a result, prices are falling and Treasury yields continue to climb, placing upward pressure on mortgage rates.

The 30-year fixed-rate mortgage (based on zero discount points) moved well above 5.25 percent, while the 15-year fixed-rate mortgage edged up to just over 4.625 percent. The introductory rate on the one-year adjustable-rate mortgage jumped to 3.75 percent.

In spite of the uptick in mortgage rates, applications rose 5 percent for the week ending June 27, according to the Mortgage Bankers Association. Purchases climbed 6.6 percent, while refis were up 4.8 percent, accounting for almost 76 percent of mortgage activity.

Stocks posted their best quarterly gains in three years, but in spite of the big run up in the Dow Jones Industrial and the Nasdaq, Treasuries held their ground. Buying was sustained due to weak economic reports, the threat of deflation and hope for a big rate cut, which vanished after the Fed met last week.

Recent economic news leaned toward the negative side with most reports coming in below expectations. The Chicago PMI and the ISM indices on June manufacturing conditions rose, but only incrementally, providing temporary disappointment. New construction in May plunged 1.7 percent, but factory orders showed unexpected strength, rising 0.4 percent.

There is little in the way of influential economic news scheduled for release over the next several days. This will leave Wall Street to focus on earnings warnings and the onset of earnings season. If economic news comes in on target, Treasuries are unlikely to attract buyers, leading to higher mortgage rates.

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

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