Jobs report sends mortgage rates higher
By Holden Lewis • Bankrate.com

Mortgage rates drifted upward to nearly a four-year high during a week when a report on employment delivered better-than-expected news.

The benchmark 30-year fixed-rate mortgage rose 5 basis points to 6.56 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.39 discount and origination points. One year ago, the mortgage index was 5.95 percent; four weeks ago, it was 6.43 percent.

The 15-year fixed-rate mortgage rose 4 basis points to 6.21 percent. The 5/1 adjustable-rate mortgage rose 8 basis points to 6.25 percent.

The last time the 30-year fixed was higher was the week of June 26, 2002, when the benchmark rate weighed in at 6.57 percent. About a year after that, it bottomed out at 5.28 percent. It then took almost three years for the 30-year fixed to regain that one-year plunge.

Mortgage applications fall
Not so surprisingly, the number of mortgage applications fell. Total applications were down 5.5 percent compared to the previous week, according to the Mortgage Bankers Association. The decline in refinance applications was steeper, at 6.6 percent, as more homeowners decided to stick with the mortgage rates that they have now.

Bond yields -- and with them, mortgage rates -- went up in response to the March employment report, in which the Labor Department said the net number of nonfarm jobs grew by 211,000. That was a bigger increase than the expected 190,000. The unemployment rate fell to 4.7 percent from the previous rate of 4.8 percent.

The conventional wisdom holds that greater-than-expected job growth and a falling unemployment rate herald rising inflation because scarce workers will be able to demand higher wages. That hasn't been happening during this part of the economic cycle: Rising corporate profits have mostly been going to stockholders and executives, not to nonsupervisory workers. But the bond market is sensitive to any whiff of inflation, sending bond yields and mortgage rates higher.

Assumptions questioned
Richard W. Fisher, the president of the Federal Reserve Bank of Dallas, noted last week that economists have been rethinking the connection between employment and inflation. Speaking in Wichita Falls, Texas, Fisher said that the notion that low unemployment breeds inflation is "based on assumptions of a world that exists no more."

Former Fed Chairman Alan Greenspan was one of the first to understand that globalization smudged the link between employment and inflation, Fisher said. In the 1990s, Greenspan insisted on postponing rate hikes when other members of the rate-setting committee wanted to increase them. Greenspan understood that U.S. workers were constrained from asking for raises because they knew they were competing with workers abroad.

Fisher's speech -- and another one he delivered a week later in Dallas about globalization -- could be considered dovish on interest rate policy. In other words, he sounds like a guy who thinks the Fed should stop hiking short-term rates sooner rather than later. But Fisher does not sit on the rate-setting committee and won't until 2008.

If the Fed is trying to send a signal, the bond market probably won't pay attention until the messenger is a member of the rate-setting committee.