The yield on the benchmark 10-year Treasury note, which affects yields on all types of financing, rose to a four-year high this week. The rise in yields was stoked by ongoing inflation concerns which were further supported by higher inflation data at both the consumer level and wholesale level. Stronger inflation may cause the Fed to raise short-term interest rates more than forecasted this coming year which would not be friendly to bonds. However, after two weeks of selling in both the stock market and bond market, equities shined higher this week, even with the 10-year Treasury note touching 2.95%. At what point Treasury yields “take the shine out of equities” is anyone’s guess, but this author’s feeling is that rates moving above 3.000% will put pressure on equities and hard assets.
The big question that remains is whether inflation will continue to rise and eventually meet or exceed Fed inflation target rates. A faster pick-up inflation could result in another vicious bond and equity sell-off.
While interest rates are higher, rates are still attractive from a historical perspective. It also should be noted that rising inflation is not “all bad” as recent increases in both wage and consumer inflation are being supported by a strong global economic expansion and a high level of business confidence in the U.S. The low level of housing inventory, will continue to keep home demand high with lenders increasing loan product offerings in the face of rising prices and an ultra-competitive purchase market.
With the big move in rates, we remain cautiously biased toward floating interest rates due to the quick move higher in all yields the past couple of weeks. We reiterate this position with extreme caution as the bond market has not been friendly to those borrowers floating interest rates as of late.
