Market Commentary 8/11/17

Volatility returned to the market this week as tensions between the United States and North Korea escalated.  The VIX index, which is known as the “fear index” and is used to measure near-term volatility, rose over 40% on Thursday in response to both the aforementioned geopolitical tensions and some disappointing earnings reports.  While bond yields have been drifting mildly lower, interest rates did not drop dramatically even with the uptick in volatility and the sell-off in equities.

Economically, lackluster reports both Thursday and Friday on inflation also did not push yields lower, which is somewhat surprising given that inflation is a major threat to bonds and the tame inflation numbers on the CPI and PPI usually correlates to lower interest rates.  However, the Fed’s intention to both continue to raise short-term interest rates and reduce its balance sheet have left the markets wondering how bond yields will respond to these policies. This has most certainly helped keep rates higher given the current circumstances this past week.

With mortgage bond prices near the 2017 highs, rates at the 2017 lows, and the 10-year yield at its recent low, we are biased toward locking in interest rates at current prices.