U.S. interest rates continue to trade in a tight range in response to emerging markets’ struggles with dollar-denominated debt and Europe’s slowing economy as government interest rates in other major economies remain at or near zero.
Also helping to keep rates low is slow and gradual inflation data. This week, the Fed’s preferred measure of inflation, the personal consumption expenditure (PCE), ticked up but was in line with forecasts. Inflation is not necessarily a bad thing if kept in check, and the most recent report confirms a healthy level of inflation.
Even with housing data suggesting a slowdown in home sales, consumer confidence remains strong, as are corporate earnings and domestic economic growth.
The so-called flattening yield curve causes some concern. Short-term and long-term Treasury spreads are right around 20 basis points. There are many theories as to why, but we advise to watch this closely, because should the yield curve invert, this inversion may be signaling an oncoming recession. For the moment, there is no real data suggesting a recession is around the corner.
We continue to remain cautious and believe locking-in interest rates to be the prudent choice. While we don’t see interest rates dramatically moving higher short-term, we would not be surprised to see the 10-year Treasury note trading above 3% in the near future.
Have a great and safe Labor Day!