Concord Condominiums

Further indications of solid economic growth fostered another round of selling of U.S. Treasury securities Tuesday. A strong reading on Factory Orders for June and vigorous Personal Spending, supported by hefty auto sales, concerned bond traders who see powerful economic advances as a precursor to inflation, which erodes the value of fixed-rate assets, such as Treasuries. The fact that the inflation indicator within the personal spending report was flat eased what could have been a nasty fall in the bond pits.

Selling in Treasuries was strong on opening, but then reversed course, only to regain momentum toward the end of the session. Treasury prices closed down and their yields, which move in the opposite direction of prices, continued to climb. This recent surge in Treasury yields, which mortgage lenders use as guides to set rates, has sent mortgage rates scurrying higher in order to keep pace with soaring yields. Yields were moving incrementally higher in July, but lenders appeared to rein in mortgage increases. The recent surge in yields, however, has forced lenders to raise rates on most mortgage products. In fact, the 30-year fixed rate is at its highest level since the second week in April.

The reports that weighed on Treasuries showed personal spending in June up 0.8 percent, which was in line with forecasts, put far stronger than the 0.2 percent increase in May. Personal income rose 0.5 percent, exceeding the estimate for a 0.4 percent increase. The most reassuring part of the report for stocks and bonds alike is that personal consumption expenditures, i.e., the core deflator, was unchanged after a 0.2 percent increase in May. This points to economic growth without inflation. In a separate report, Factory Orders in June rose 1.0 percent, which was right on target. However, orders for May were revised upward to show a 3.6 percent increase. Oil prices continued to climb hitting yet another high. They closed at $61.89 a barrel, but the indicators released this morning trumped the impact.

Stocks Rally on Economic Reports, Corporate News

The three major stock indexes made big gains on Tuesday, led by the Nasdaq composite, which scaled over the 2200 mark to post a 1 percent gain. Strong earnings from the chip sector pushed the Philadelphia Semiconductor Index (SOX) up more than 2 percent, and gains by Yahoo! and Amazon.com boosted the Internet index. All the tech bellwethers, with the exception of IBM, posted strong increases led by JDS Uniphase and Microsoft, with gains of 4.6 percent and 3.4 percent, respectively. Qualcomm , Cisco Systems, Intel, Yahoo! and Ericsson each added more than 1 percent on the session.

The Dow Jones Industrials closed off their highs, but winners still outnumbered losers three to one. Microsoft led in gains, followed by Alcoa, which rose 3 percent on an upgrade of mining stocks. DuPont and Intel also added in the area of 1.75 percent each, with four additional components - American Express, Pfizer, Honeywell and AIG - closing with gains upward of 1 percent. Home Depot was the only Dow component to shed more than 1 percent, hurt most likely by the increase in mortgage rates. Homebuilders' shares were under pressure for the same reason.

At closing: The Dow 30 Industrial Index rose 59.24 points or 0.56 percent to10,682.39; the Nasdaq Composite index was up 22.08 points or 1.01 percent at 2,217.46, and the benchmark Standard & Poor's 500 Index gained 8.56 points or 0.69 percent to close at 1,243.91.

The 30-year Treasury bond was down 18/32 in price with the yield rising to 4.54 percent versus 4.51 percent at Monday's close.

The 10-year Treasury note was down 6/32 in price with the yield rising to 4.33 percent versus 4.31 percent at Monday's close.

The 5-year Treasury note was down 1/32 in price with the yield rising to 4.16 percent versus 4.15 percent at Monday's close.

AVERAGE mortgage rates (zero discount points) based on rates collected nationwide were:

The 30-year Conventional Fixed-Rate Mortgage was at 5.692 percent from 5.656 percent at Monday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.282 percent from 5.25 percent at Monday's close.

Coming Up

The only report due on Wednesday comes from the Institute of Supply Management. It will release the July index on conditions in the services sector. Although millions of people are employed in the service sector, its impact on the markets is relatively mild when compared with the index on manufacturing. Analysts are expecting the index on services to come in at 61.3, which would be a slight decline from the 62.2 reading in June. Because reports are slim over the next couple of days, the markets may begin to turn their attention to the July Employment Report, due out Friday.

Treasury yields rose again on Tuesday and mortgage rates followed. With no major changes on the horizon until Friday's jobs report, it is likely that mortgage rates will remain at current high levels.

Carolyn Siegel

carolyn@interest.com

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