Houston's Rate Sheet

Rates keep going and going!

Rates have been steadily going up this week. Until today, there hasn't been much activity on the economic calendar front, and the market has relied heavily on geopolitics and last week's employment report to justify further increases. Then we got a retail report today that helped to push rates even higher. Here are some excerpts from Holden Lewis’ (Bankrate.com's mortgage guru) blog from Wednesday and Thursday:

Wednesday:

The average rate on a 30-year, fixed-rate mortgage is up 5 basis points this week, to 6.56 percent. I blame the way the bond market interpreted last week's report on March employment, when job creation was better than expected and the unemployment rate went down. Wages weren't up much, a factor that implies that the unemployment rate is somehow understated. But the bond market paid more attention to the unemployment rate than to the wage data and reacted to signals implying inflation.

Blogger Billmon takes a crack at explaining why working people don't seem to think the economy is going gangbusters. You can see it in the first two charts, which show corporate profits rising smartly while wages stagnate.

Based on a couple of speeches that Richard W. Fisher, president of the Dallas Fed, made in the last week, I think the Fed is beginning to drop hints that globalization is keeping wages down, and thus, keeping inflation in check.

If this is the beginning of a PR campaign by the Fed, the central bank is trying to send a message that the rate hikes are about to end, and markets need not worry about inflation. Bond traders could react either of two ways. They could take the Fed at its word, and keep long-term yields relatively steady, or they could conclude that the Fed isn't serious about inflation, and send long-term yields higher. I think the first possibility is more likely.

Thursday:

Bond traders leapt right over the 5 percent hurdle today, humbling me and at least one other prognosticator who thought that the 10-year Treasury yield would flirt with, but not exceed, 5 percent for a while.

After the report on March retail sales came out today, the 10-year Treasury's yield jumped. This afternoon it's 5.04 percent. Retail sales rose 0.6 percent in March(better than expected), and the initial estimate for February, which showed a 1.4 percent decline in retail sales, was revised to reflect a smaller decline of 0.8 percent. All relatively good news, and enough to spur investors to sell bonds and buy stocks. Bond prices fell and the yields rose.

Mortgage rates are rising a similar amount today -- the national average is probably about one-sixteenth of a point higher today than yesterday.

SPEAKING OF RATES: The average rate on a 30-year fixed went up 5 basis points, to 6.56 percent, in the last week, according to Bankrate's weekly mortgage rate survey. The 5/1 ARM went up 8 basis points, to 6.25 percent.

posted by Vincent Biondillo @ 3:53 PM