It was a tough week for stocks and bonds. Several factors were at play, including higher interest rates, geopolitical risks such as the threat of trade tariffs with China, and eurozone risks including the looming issues with the Italian debt markets. On Friday, soft inflation data coupled with good bank earnings helped to ease the rise in bonds and calmed U.S. equities markets. However, the trading week was brutal as both stocks and bonds broke down and the reliable relationship that usually sees government and treasury bond yields rally when stocks experience steep declines.
As the Fed attempts to normalize interest rates after a decade of ultra-low or accommodative rates, it should come as no surprise that equity markets could be hurt by a repricing of risk based on higher interest rates. However, our hope remains that the Fed will be able to move to a neutral rate without the equity tantrums seen a few years ago. The U.S. economy remains strong with business confidence high, corporate earnings healthy, and major economic readings continuing to support more normalized interest rates. Therefore, rates are being moved higher for the right reasons at the moment.
Fears remain which could help bond yield stay attractive here in the U.S. including the aforementioned issued with Italy debt, the slowing of the Chinese economy, and near-zero interest rates in Japan and Germany. Rate experts do see the 10-year Treasury note, the benchmark for pricing everything from car loans to mortgages, settling in between 3.25% to 3.500%, which is still attractive from historical perspectives.
New home buyers can use the recent rise in interest rates to negotiate with sellers on price. Banks need to lend and are continuing to hold down shorter date ARM rates in a bid to drive business. We remain cautious and believe locking-in rates at still attractive levels is the prudent move.