Fed Comments Excite Markets

Long- and short-term mortgage rates rose 7 basis points from a week ago, according to Freddie Mac’s latest weekly survey of 125 mortgage-lending thrifts, companies and commercial banks.

The increase pushed the 30-year fixed-rate mortgage average to 6.78% this week, Freddie said. At this time last year, the average was 1.25% lower.

The 15-year rose to 6.43%, Freddie said.

“Financial markets continue to expect more rate hikes by the Fed over the next six months, which has added upward pressure on mortgage rates,” said Frank Nothaft, Freddie chief economist, in the statement.

The Bond Market Association announced Tuesday the consensus view of its Economic Advisory Committee is that “the yield curve will remain inverted, and the panel expects the yield on the 10-year Treasury note to remain near 5.25 percent at the end of September and hold there through mid-2007.”

The trade group’s panel of senior economists unanimously expects the central bank to raise the federal funds target rate by 25 BPS to 5.25% today, increase it by the same amount again before yearend and reduce it by quarter-point sometime in early 2007.

“The real question is what the Fed will say in its accompanying statement,” after the June meetings, the association said. “Most committee members expect the statement to be consistent with past pronouncements that further tightening could be needed to address inflation. However, some panelists believe it will acknowledge that a moderation in economic growth is already under way.”

And the Fed did speak today, raising the federal funds target rate by 25 BPS to 5.25% but signaling that further rate increases are not a given.

“The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth,” the Federal Open Market Committee said in a statement today.

“Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices,” it added. “Readings on core inflation have been elevated in recent months,” plus “the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.“

In response to the Fed’s comments, the Dow Jones Industrial Average soared over 200 points and bonds rallied.

And contrary to the bond group’s prediction of a continued yield-curve inversion, the 10-year Treasury note yielded 5.20% late Thursday while the 2-year’s yield was 5.19% — reversing yesterday’s inversion which had the 2-year 3 BPS higher than the 10-year.

The 7-BPS weekly increase in Treasury-indexed 5-year hybrid and 1-year adjustable-rate mortgages moved up their respective averages to 6.39% and 5.82% this week, Freddie reported.

The 1-year T-bill itself stood at 5.30% Wednesday, up 8 BPS from a week earlier, according to the Federal Reserve Statistical Release.“The real question is what the Fed will say in its accompanying statement,” after the June meetings, the association said.

Over the next 35 to 45 days, mortgage rates will keep rising, according to nearly two-thirds of the 100 mortgage “experts” surveyed by Bankrate.com this week. A quarter forecasted a downturn and the rest thought rates would remain relatively unchanged.

The measure of mortgage application volume fell 7% from the previous week, thanks to a 6% downturn in home purchase money demand and an 8% decrease in refinance requests, the Mortgage Bankers Association reported Wednesday.

Refinance applications comprised 35% of total 1003s, unchanged from the prior week, and the ARM share edged down to 29%, MBA said.