Global yields continue to move lower benefitting borrowers in a significant way. Domestically, the so-called “Powell Put” has helped equities rise as traders have greater confidence in bidding on riskier investments.
The 10-year Treasury is trading under 2.65% which is making mortgage rates ultra attractive again and from what we can see, increased loan volume greatly. While our domestic rates are low, rates are even lower across the pond. In fact, there are hints that the European Central Bank might soon lower short rates in the face of a slowing European economy, Brexit confusion, and looming Italian debt concerns. Add a deflationary Japan and a slowing China economy to the mix, and therein lies the reason our domestic rates while low are actually quite high in relation to the rest of the developed world.
No big economic news this week, but next week will be important with multiple inflation reports coming out. If inflation remains tame, we could see rates move lower. Should we get a surprise higher on inflation, rates will adjust quickly. The Fed calmed markets late last month as they confirmed rates increases and the Fed balance sheet reduction was not on auto-pilot. A hot inflation reading could challenge those statements, especially with a booming U.S. economy, and historically low unemployment.
Home buyers are taking advantage of these low rates, and with a drop in home prices, we are seeing greater activity from buyers. We remain biased toward locking-in rates at these low levels (to be fair, levels we thought we would not revisit again for quite some time).
It’s anyone’s guess how low bond yields can go with short-term government-guaranteed European and Japanese debt offering negative yields. The idea of a negative interest rate is probably something that none of us thought was possible. Bill Gross, the famed bond manager, seems to feel that something will have to give, saying, “In recent weeks markets have witnessed Mario Draghi of the European Central Bank (ECB) speak to ‘no limit’ to how low Euroland yields could be pushed – as if he were a two-time Texas Hold’em poker champion.” He then noted that in turn, Janet Yellen halted the Fed’s well-advertised tightening cycle at 25 basis points, at least temporarily, followed a few days later her counterpart at the Bank of Japan, Haruhiko Kuroda, decided to enter the “black hole of negative interest rates much like the ECB and three other European central banks.”
Domestically, U.S. bonds have benefited from these central bank policies with the 10-year Treasury trading around 1.84% as of Friday afternoon (2/5/16). A mixed job report further benefitted mortgage bonds this morning. The jobs report for January came in at less than 40,000 than predicted. However, the jobless rate did fall to less than 5%. Volatility in various sectors including global equities, the oil patch and loans made to the oil industry all continue to weigh on the market as well. These factors too are helping to push yields lower.
Though rate increases are on the horizon, experts believe the Fed will hike rates no more than four times in 2016.
Technically, bonds are overbought, and we remain biased toward locking in interest rates with yields at these levels.