Stocks collapsed on Friday with oil dropping below $30 per barrel; China is entering a bear market and retail sales in the U.S. fell. This is some pretty scary news and U.S. bonds have benefited greatly with the 10-year U.S. Treasury bond yield dipping below 2%. Falling inflation and weaker global growth are weighing heavily on the markets this week. The market is not off to a good start in 2016.

On the interest rate front, the Federal Reserve is unlikely to raise rates four times this year as previously discussed. Mortgage bonds should continue to benefit from all of this uncertainty.

We remain cautious on where interest rates may go from here given where rates have gone the start of this year. However, clients will benefit on both purchases and refinances with sub 2% 10-year U.S. Treasury interest rates, and therefore we remain biased toward floating interest rates given the current volatile world market.

U.S. interest rates are modestly lower this week after a brutal global sell-off in stocks. China’s economic troubles, the sharp decline in oil and other commodity prices, and the yield increases in junk bonds are all signals of deep fundamental problems. The stock markets took note of these issues this week with a violent sell-off.

Friday brought another jobs report, which blew past expectations. However, hourly earnings were unchanged while the unemployment rate held firm at 5%. The absence of wage inflation was credited for keeping bond yields from rising. With oil and other major commodities at multi-year lows and no sign of wage earning growth, it is hard to imagine bond yields rising much, even with the Federal Reserve’s recent increase in short-term rates.

With so much concern for the direction of the global economy, we remain biased toward floating interest rates at this time.

U.S. bonds rallied late this week after the expected Fed increase of .25% on short term overnight lending rates. It is important to make the distinction between short-term and longer-term interest rates. While the Fed can control short-term interest rates and to a much lesser extent, longer term interest rates, the ultimate driver of longer term interest rates is the market and the expectations on inflation, employment and economic growth. With inflation non-existent and an anemic world economy barely in recovery, we are not surprised to see interest yields decline in the face of this Fed rate hike. The smart money was well aware of the high probability of this rate hike and adjusted to it well before the normal citizen.

The stock market is having another volatile week which benefits the safe haven of the bond markets. With monetary policy so complicated given the various opaque stimulus initiatives having been constructed by the U.S., European, Japanese and Chinese policymakers, we continue to be biased toward locking in loan programs when the rates look attractive.

U.S. bonds yields rallied hard today (yields and price move inversely) on falling oil prices and concerns over high-yield debt especially within the energy sector. Overall, the stock market had a tough week with both the Dow Jones Industrial average and S&P 500 closing down over 3% for the week.

Surprisingly, bonds rallied into inflationary news that was reported this morning. Wholesale inflation was higher and rose at the fastest pace since June. Even the almost certainty of a December rate hike by the Federal Reserves did not deter bonds. U.S. 10-year Treasury yield closed the week at 2.148%

A quick thought on oil: Oil closed at $35.36/barrel this week. Most of us never thought we would see oil under $60 per barrel in our lifetimes; the current price is remarkable. While putting an average of $350 in each consumers’ pocket this year, the low price of oil is troubling because oil is used in so many of our businesses from manufacturing to product development to transportation. The key question to ask is: What is $35 oil telling us? Obviously, the market is concerned.

With so much negativity in the air, we are biased toward floating interest rates at this time.

Friday’s rally was a welcomed relief for U.S. equities and a better than fair day for U.S. bonds after a tough week for both stocks and bonds. The November Employment Report released early Friday confirmed that the U.S. economy is still recovering with 211,000 new jobs created in November. With the employment coming in above expectations, a Fed rate hike later this month is all but certain. What the Fed does after the initial lift off from zero is anyone’s guess, but be prepared for a ¼% raise in the overnight rates later this month. The smart money has already factored this pricing in so the adjustment in the marketplace should be muted when the Fed actually announces the rate hike.

A rough sell-off mid-week is a good reminder that with rates still at historical lows, locking in your loan is a very prudent practice in the current market. However, with bonds trading well today, we are biased toward cautiously floating interest rates into next week.

Our thoughts are with the city of Paris.

U.S. mortgage rates remained range-bound with the 10-year U.S. Treasury trading down to 2.24% Friday morning from 2.30% earlier in the week. Friday was “a no-activity day” with respect to economic reporting.

However, the Federal Open Market Committee released its minutes this week which eased the stock markets. The consensus is that even if the Fed raises interest rates, they will do so very gingerly. Further placing a ceiling on U.S. interest rates was dovish commentary out of the European Central Bank (ECB). More stimulus could be coming to help boost inflation.

At the moment, we are carefully biased toward floating interest rates given the recent rise in rates in the U.S., as well as considering the economic and geopolitical events surrounding the globe.

U.S. bonds are trading better Friday morning after several bond-friendly economic reports and an ongoing decline in the world stock markets this past week. Heavy on traders’ minds is the decline in oil and other commodities which is a deflationary signal. Each and every week we attempt to make sense of the markets, but the data is so mixed, it remains quite challenging.   

From a short-term rate increase standpoint, many feel that the Federal Reserve will raise short-term interest rates in December, even though there is still no sign of inflation (as evidenced by this morning’s Producer Price Index (PPI) report) simply because the Fed indicated it would do so in its last meeting. This is creating even further confusion as inflation and wage growth are non-existent, the Fed’s dual mandates behind raising interest rates continues to be argued by both dissenters and supporters. Some are saying that the low interest rates are causing deflation and that by raising rates, inflation would follow. We will leave that argument to the experts. 

Therefore, based on today’s deflationary reports, we are biased toward floating interest rates very carefully into next week’s widely followed Consumer Price Index (CPI) report.

U.S. bonds are having a tough end to a bad week. With chatter growing throughout the week about a December rate hike, the spectacular October jobs report has made a December rate hike feel like almost a done deal. The October payrolls grew by 271,000, well more than expectations of 185,000. The unemployment rate fell one-tenth to 5%, and the closely watched employment participation rate (U6) fell to 9.8%.

U.S. Treasuries are getting clobbered Friday morning with the 10-year treasury yielding 2.30%, and the 2-year treasury spiking to .91%, a level not seen since May 2010.

With adjustable rate mortgages (ARM) still very attractive and fixed rate mortgages still near 4%, we are strongly biased toward locking in interest rates.

U.S. bonds had a tough week with the 10-year U.S. treasury trading up to 2.18% after the Federal Open Market Committee (FOMC) comments on Wednesday.

Commentary from FOMC did not rule out a rate hike this December. In its policy statement, the FOMC reiterated its dual mandate of full employment and 2% percent inflation as a continued theme in the decision to raise short term interest rates. The comments suggested that continued modest increases in employment could tip the Fed to raise rates. No one knows for sure, but trading suggested a stronger bias toward a December 2015 rate hike after the FOMC comments were released.

While U.S. policy makers continue to discuss rate hikes the rest of the world continues to ponder how to use monetary tools to stimulate their economies. How this will play out is anyone’s guess.

With so many diverging policy making decisions being presented on a global scale, we are watching the market closely and are very cautiously floating interest rates at this time.