U.S. bonds and equities traded positively today as bonds attempted to recover from touching the highest yield seen within the last four and a half years. Equities continue to recover from the violent sell-off witnessed a couple of weeks ago.
The 10-year Treasury note, which is a barometer for all types of credit from consumer loans to corporate debt, reached 2.960% mid-week, but closed out the week a touch lower at 2.886%. We expect the 10-year to reach 3.000% near-term and we’re delighted to see some retrenchment in interest rates after what has been a rough couple of weeks for bonds. With little economic news out this week, the market experts are all awaiting some key reports due out next week, notably data on housing, GDP, and the closely watched Core PCE (personal consumption expenditures), which is the Fed’s favorite gauge of inflation. If the PCE reading is hotter than expected, global government bond yields will move higher quickly.
As to why interest rates are moving higher, we believe the reasons are mostly positive and may be attributed to ongoing signs of robust global growth, business optimism, strong earnings forecasts, the unwinding of QE (quantitative easing) and rising consumer and wage inflation. Whether or not the move up in interest rates becomes an impediment to the economy is yet to be determined. Our belief is that should the long bond 10-year Treasury yield hit above 3.250%, we will see increased volatility in equity and hard asset pricing.
We remain biased toward locking in interest rates as we are still locating attractive home loan programs by historical standards, but at the same time, we are witnessing much greater volatility in the daily pricing sheets from our lending relationships.
