Malden Condominiums

U.S. Treasury securities staged an abbreviated rally Tuesday morning due to weakness in overseas equity markets and strength in foreign bonds. But the move up was halted by inflation worries and another rate hike by the Federal Open Market Committee. Although the 25-basis-point increase in the fed funds target rate was fully expected and priced into the market, traders were hoping for clues as to the Fed's future intentions. They were, however, greeted with a well-worn statement saying, 'Longer term, the economy remains strong and should benefit from hurricane-related rebuilding in the affected areas.' As it has before, the statement confirmed that long-term inflation remains contained.

'With underlying inflation expected to be contained,' the Fed added, 'the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.' This means the Fed would likely raise rates at its next two meetings, scheduled for Dec. 13 and Jan. 30-31, 2006. With little in the way of relief on the horizon, Treasuries sold, sending prices lower and their yields, which move in the opposite direction of prices, up. With the exception of a couple of winning sessions, Treasury yields have made huge gains over the past seven sessions, forcing mortgage lenders to raise rates to keep pace with yield increases.

The ISM index on manufacturing conditions in October also weighed on Treasuries. Although the index dipped to 59.1 from the 59.4 posted in September, it was stronger than forecast. It also featured a 'prices paid' index of 84 (up from a previous 78), which was the highest reading since May 2004. What manufacturers pay for their goods could be passed on to the consumer, resulting in inflation. Signs of inflation, which erodes the value of fixed-rate assets, are unwelcome by bond traders. The employment index in the report rose only slightly. The only other report released Tuesday showed Construction Spending increasing by 0.5 percent - just shy of the 0.6 percent estimate, but better than the 0.4-percent increase in September.

Stocks Fail in Rally Attempt

A lowered earnings forecast by Dell that sent shares down 8.3 percent, and a 23 percent slide in October sales for GM (and Ford) sounded a sour note on Wall Street. High prices at the pump kept buyers away from popular SUVs. These reports affected both the Dow Jones Industrials and the Nasdaq composite. After making a run for positive territory just after the Fed announcement, stocks receded, closing at their lowest levels of the day. Intel, which is traded on the Nasdaq but is a member of the Dow 30, led all losers with a 3.8-percent decline. The other five components down more than 1 percent represented a number of sectors.

As much as Dell hurt the Nasdaq, along with Sun Microsystems, which was down 3.8 percent, there were come bright spots. IAC/InterActiveCorporation reported higher earnings thanks to its search engine, Ask Jeeves. This supported gains by sector mates Google and Yahoo!

At 4:00 p.m. EST:

The Dow 30 Industrial Index fell 33.70 points (-0.32 percent) to10,406.77; the Nasdaq Composite index closed down 6.25 points (-0.29 percent) to 2,114.05 and the benchmark Standard & Poor's 500 Index slid 4.25points (-0.35 percent) to 1,202.76.

The 30-year Treasury bond was down 7/32 in price with the yield rising to 4.76percent from 4.75 percent late on Monday.

The 10-year Treasury note was down 5/32 in price with the yield climbing to4.57 percent from 4.56 percent late on Monday.

The 5-year Treasury note edged down 3/32 in price with the yield rising to4.46 percent from 4.44 percent late Monday afternoon.

At 2:00 p.m. EST, AVERAGE mortgage rates (zero discount points) based onrates collected nationwide were:

The 30-year Conventional Fixed-Rate Mortgage was at 6.03 percent from 5.971 percent late on Monday.

The 15-year Conventional Fixed-Rate Mortgage was at 5.574 percent from 5.537 percent late on Monday.

Coming Up:

There are no economic reports slated for release on Wednesday, which will leave the financial markets to dwell on the rate increase today and the October Employment Report due out on Friday. This does not bode well for mortgage rates, as worried traders generally hold or sell rather than buy. This would leave Treasury yields at high levels and mortgage rates would match them.

Carolyn Siegel

carolyn@interest.com

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