May-10-blog

Market Commentary 5/10/19

U.S. consumer prices rose moderately in April but less than expected.  Low inflation readings will keep a lid on bond yields, as well as reinforce the Fed’s position keeping short-term lending rates unchanged for the rest of the year.  With inflation in check, some are opining for the Fed to lower interest rates. We tend to disagree and believe a wait-and-see position by the Fed is wiser, as there are some indicators that inflation may pick up and that ultimately these low inflation readings may be transitory.

In other important news, trade talks fell apart this week with China.  This resulted in higher tariffs being placed today on Chinese goods imported into the U.S., which will likely lead to retaliation from China sometime in the near future. How these negotiations go is anyone’s guess, but the consensus is that a deal will be struck eventually.  However, there is always a chance that negotiations could fall apart and a full-blown trade war will occur, or that these negotiations will drag on much longer than expected. Those fears, while remote, have helped push long-dated treasury bonds lower in what is known as a “flight to quality.” The trade tensions also dented equities this week as analysts reassess the effects of ongoing trade tensions on future economic growth and corporate earnings.   

Low rates do benefit our borrowers and have spurred both a good home buying season, as well as our clients who have refinanced into lower rates. With the 10-year Treasury note trading under 2.500%, we remain biased toward locking in interest rates. Should the U.S. strike a trade deal with China, we could easily see rates move up from here.  

Market Commentary – 2/5/16

Blog-bondsIt’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.