Market Commentary 5/12/17

U.S. government bonds and mortgage rates have been strengthening since yesterday afternoon and throughout today as demand for safe haven assets increased. U.S. equities closed the week out with their worst trading week in about a month.

One reason for the rally in bond yields today was the soft reporting out of the Consumer Price Index (CPI), which is a closely watched inflation indicator and measure of what consumers pay for most finished goods. The CPI index was up 0.2% in April and in line with estimates. Core CPI, which strips out food and energy data, saw a just 0.1% gain in April, a touch below the 0.2% expected. The year-over-year CPI reading slipped to 1.9% from the plus 2% that has been the norm over the past 12 months. This low trajectory of consumer inflation is good news for bonds and as evidenced by the 10-year Treasury yield closing the week out at 2.32%.

On a separate note, first-time home buyers are on the increase. The Census Bureau shows that 854,000 new-owner households were formed during the first quarter of 2017 versus the 365,000 new rental households. It’s the first time in 10 years that there were more new buyers than new renters, according to Trulia.com. Seeing such a shift from buying a home rather than renting is a very good sign of ongoing confidence by young people in our economy. We are delighted to see that the younger generations are participating in the American dream of owning a home.

Given the strong rally today in bonds, we are biased toward floating rates as we can see rates dropping further in the short term. In the long term, the old notion of “don’t fight the Fed” must not be forgotten. The Central Bank continues to call for higher interest rates, and we feel one must be pay close attention to their commentary.