Massive Stimulus Package Pushes Bond Yields Up
Interest rates are rising. This should not come as a surprise given the combination of new factors. Increased vaccinations are lighting a fire of greater economic activity and lowering unemployment. There’s the new massive $1.9 trillion stimulus package. Prices are on the rise for basic goods such as food, lumber, gasoline, and more. Assets such as equities, real estate, and Bitcoin have been soaring to record highs. But that is the type of inflation everyone loves. Consumer inflation, the everyday rise of the price of goods and services, is the greater concern. Personally, I was astonished the other day when I went to the market. Prices have certainly risen to the point where I took notice.
It is hard to square the massive government spending against extraordinary low interest rates, especially as the world recovers from Covid-19. Something will have to give and it is probable that investors will demand higher yields for buying our debt. Should rates grind higher, expect a cooling of long-duration growth stocks. It may also affect high-priced real estate, and speculative plays on crypto-currency. Perhaps many homeowners are also thinking the same thing as purchases, rates, and term refinances roar on. Especially interesting is the rise in cash-out refinances. Cashing out of your home with an interest rate below inflation is a wonderful thing as you ensure paying off debt with inflating dollars. There is a point not too far from where we are trading where higher interest rates will cool off the mortgage market, as well as, limit how high home prices can go. For the moment, with the 10-year Treasury trading at 1.61%, interest rates are still highly accommodative.
Be prepared for a quick move to 2.000% on the 10-year Treasury if rates steady above 1.600%. We are actively watching the bond market; we do our very best to navigate borrowers during this very volatile time. The bond market sure appears to want to test Fed policy and challenge some of the exuberance in the equity market. With rates in a rising channel, for those actively looking to buy or considering refinancing, there is no time like the present.
