Mortgage backed securities (MBS) prices continue to climb higher (rates lower), extending the rally for a fifth day, after a Labor Department report showed consumer prices rose less than forecast, easing concern inflation will accelerate. Consumer Price Index (CPI), the broadest monthly price gauge because it includes goods and services, increased 0.1% in May despite higher energy costs. The boost in energy costs was due to a 3.1% gain in gasoline prices, though partly offset by declines in natural gas. Higher energy prices restrain discretionary spending, preventing companies from passing increased costs on to customers. The “core” rate, excluding food and fuel, climbed 0.1%. The core index benefited from subdued rental prices, 40% of the total, and falling prices for public transportation, apparel and tobacco. The outlook among traders for consumer prices is 1.78% and down from a 2.23% 5yr average, reflected by the difference between the 10yr note and Treasury Inflation Protected Securities (TIPS). Mortgage applications fell to the lowest level since November, reflecting the dampening effect of rising interest rates and limited credit availability. Purchase applications fell a disappointing 3.5% last week, combined with indications of limited buying interest point to dismal home sales data at months end. The refinance index fell sharply, down 23%, with mortgage rates up about 75bps from a month ago. The jump in borrowing costs discourage homeowners from refinancing and may deepen the housing slump. The Fed is scheduled to purchase 7-10yr securities today, part of its $300 billion buyback program, after buying $6.45 billion of 3yr notes yesterday.
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