Bonds have been on a tear as rates have dropped in response to a variety of factors including a very volatile December for equities, a slowing global economy, Brexit, Italian debt fears, trade tensions with China, and dysfunctional political system in Washington.
The Fed this week confirmed that it will continue to be data-dependent and that monetary policy is not just simply running on auto-pilot. This was positive for both equities and those relying on debt financing.
On Wednesday, the Fed chose to keep overnight lending rates at current levels and also opined on the direction of the Fed draw down its balance sheet, also known as Quantitative Tightening (QT), as well as future rate hikes. A few months ago, most economists had three rate hikes forecasted for 2019, now, the consensus is for probably only one rate hike. All of this has pushed the 10-year Treasury yield (the benchmark lending rate to under 2.75%) which has helped increase mortgage applications, amongst other requests for credit.
The widely watched monthly jobs report did not disappoint and pushed up yields a touch this morning. The report was very positive with 304,000 jobs created in January. The unemployment rate ticked up to 4%, but so did the Labor Force Participation Rate (LFPR). Three-month average job creation is running at 240,000 jobs per month, a very strong number. During the Obama presidency, many economists though numbers like this would be unattainable this late into an economic expansion. Wage inflation remains in check (as do other inflation readings). Geopolitical concerns have taken a back seat to the resilient domestic economy for now. The U.S. equities market snapped back from an awful December with the strongest January in years. Historically low rates are still in play along with strong U.S employment and positive earnings from many big companies.
It is worth noting that some consumer confidence readings have slipped and how this will play out may not be felt for several months in the economic readings.
With rates on the rise after this strong jobs report, we believe it is prudent to strongly consider locking-in interest rates at these levels.