Sour economic news strengthens Treasury market, eases interest rates

Two rallies in U.S. Treasury securities sent prices up and yields tumbling. Strong buying was based on economic data that came in below expectations.

These reports influenced traders to buy on the hope that the Fed might rethink its plan to raise short-term interest rates three more times this year. Fed funds futures, which predict interest rates down the road, are saying they may be right.

A September increase is almost assured, but increases in November and December are up for discussion. This possibility sent the yield on the benchmark 10-year note to its lowest level in five months and mortgage rates followed.

The 30-year fixed-rate mortgage (based on zero discount points) fell to just above 5.5 percent, while the 15-year fixed-rate mortgage held at 5 percent. The introductory rate on the one-year adjustable-rate remains at 3.25 percent.

Mortgage applications fell for the second week even though interest rates dipped. According to the Mortgage Bankers Association, purchase applications fell 0.1 percent while applications to refinance slid 1.1 percent for the week ended Aug. 27.

Perhaps the biggest boost to Treasuries came from the Chicago PMI index of manufacturing conditions and the consumer confidence report. The PMI index fell almost seven points, as did the confidence survey. Concerns about jobs and the economy were the reasons cited.

The ISM report on national manufacturing conditions was not as grim as the Chicago numbers, but it missed forecasts.

Personal income rose only 0.1 percent in June -- the weakest showing in two years -- while spending topped estimates, rising 0.8 percent.

New construction and factory orders also rose, but so did weekly unemployment claims, this time by 19,000. Once again hurricane Charley was blamed for half of the rise.

The first full week of September will be light on economic news with the only influential reports coming at the end of the week. The producer price index, which checks on inflation at the wholesale level, will be the most watched, as inflation is a big factor as to whether or not the Fed will raise interest rates. The employment picture will also weigh heavily. An improving job market will pressure Treasuries, while a weak one would boost them.

Interest.com is a national publisher of mortgage rates and information.

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