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Monday, July 09, 2007

Market Rates

WHILE INDEPENDENCE DAY SIZZLED, BONDS AND HOME LOAN RATES FIZZLED...Just like a bottle rocket that turns out to be a "dud" - Mortgage Bonds sputtered and crashed lower last week, causing home loan rates to rise about .125% across the board.

The move was sparked by a variety of factors, including the Bank of England (like our Fed) announcing a hike in their benchmark interest rate to 5.75%, their highest rate in six years and .50% above our own Fed Funds Rate of 5.25%. Remember, our own US Bonds compete globally for investment dollars seeking the highest rate of return, so higher rates being offered in other countries can pull money out of our Bond market. And just like a slowing demand for any product would cause prices to decline - this caused Bond prices to move lower and home loan rates to rise.

Then the Jobs Report arrived with a bang, showing that the labor market is still hot - 132,000 new jobs were created in June, with another 75,000 jobs added to prior month's reports, and the Unemployment Rate remained at a lean 4.5%. This healthy report gives the Fed continued reason to be concerned over "wage-based inflation". This means that as employees are paid more - they have more money to spend on goods and services, which can drive prices of consumer products higher with the added demand. Additionally - employers that have to continually pay higher wages to their employees may have to raise the prices of their own goods and services, just to help retain their profit margins. This very real inflationary concern will keep the idea of a Fed rate cut on the back burner for now - and these concerns also drove inflation-hating Bonds lower still, again causing home loan rates to rise.

Rob McElroy, SunTrust Mortgage


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