Global equity markets continue their wild ride as major daily swings with a bias to the downside have become the norm. Long-dated bonds have benefited from this volatility as the 10-year Treasury yield has dipped to 2.90% from a high just a short while ago above 3.24%. There are several reasons for the drop in interest rates, but the main negative themes continue to be U.S.-China trade and tariff tensions, a partial inversion of the yield curve, fears of a slowing global economy, the end of QE in Europe, ongoing QT in the U.S., and European political issues including Brexit as well as French protests over rising fuel costs.

Economic data was light this week with only one big headline report, the consumer price index (CPI), which showed that inflation is currently contained, which is positive for bond yields.

However, with both a slowing housing market across the U.S. and what seems to be a general slowdown of global economy, relatively low rates are needed to continue to spur the economy. With that in mind, we will be carefully reading Fed comments next week. We do expect a .25% increase in the overnight banking rates to be accompanied by very dovish commentary. Hopefully, The Fed’s comments will provide a much-needed tonic for the current market negativity.

Lenders continue to price aggressively as the need for business outweighs the need for yield. We continue to see attractive rates across the lending spectrum which is a good thing for new home buyers. With rates near 2.90%, we are agnostic as to the next direction in interest rates and are very curious to read the comments from the Fed next week.

The markets were strained again this week by a confluence of factors including a slowing economy, European geopolitical issues, inconsistent messaging from the White House on the trade talks with China, and finally, an inverting of the 5 minus 2 U.S. Treasury yields. All of this meant it was a terrible week for equities.

The Jobs Report came in under expectations, which may ultimately be viewed as a good sign from the standpoint of placing a hold on raising short-term interest rates. Some Fed officials commented Friday mid-morning that a pause may be in order given the recent market turbulence. Personally, I believe the Fed will increase short-term borrowing rates by .25% in December, but temper the effect of the rate increase with dovish commentary and a lowering of expected rate increases within the 2019 and beyond forecast.

The actual November Jobs Report came in lower than expected with 155,000 new jobs created against estimates of 189,000. The unemployment rate remains unchanged and one of the lowest on record at 3.70%. The Labor Force Participation Rate remained steady at 62.90%. Wage growth did not rise above the October reading (a benefit for bonds) as wage inflation appears to be growing at a manageable pace.

Those borrowers and businesses relying on debt were happy to see the 10-year Treasury note, the benchmark for financing costs from auto-loans, corporate debt, and real estate purchase, fall to around 2.85%.

With the major downward drift in interest rates, we are heavily biased toward locking-in interest rates at these lower levels. While we don’t foresee interest rates rising rapidly, we do not foresee long-dated interest rates falling much further from these levels. We must remember that overall the U.S. economy remains strong and job creation remains positive.

Dovish commentary this past Wednesday from Federal Chairman Jerome Powell was just what the doctor ordered for both the equity and bond markets. Backing off of comments made a couple of months ago, the Fed Chair stated that Fed policy was closer to the neutral rate, in which Fed policy is neither too accommodative or too restrictive. While we still believe the Fed will raise in December, this gave markets some relief on the prospect of future rate hikes by the Fed, which has been a source of concern for many market participants who have felt the U.S. economy was still fragile and could be derailed by an aggressive Fed rate policy.

We liked the comments from the Fed and their reiteration that they will remain data dependent. The U.S. economy is in good shape for the moment with historically low unemployment levels, no threat of runaway inflation, the fear of a slowing global economy, a looming potential trade war, quantitative tightening, and a mild correction in housing. All these factors support keeping interest rates low for longer.

With the 10-year Treasury trading right above 3%, we are biased toward locking-in interest rates given the move lower. President Trump and President Xi will meet this weekend at the G-20 to hopefully resolve the trade tensions. Should the meeting surprise to the upside, rates could quickly move up on any positive news.

Signs of a slowing global economy, trade tensions with China, geopolitical concerns over Brexit, and Italian debt levels have all played a role in the very volatile stock market swings the last several weeks. Compounding these concerns is the rate trajectory set by the Federal Reserve which is also weighing heavily on the overall market. While business sentiment remains high, if there is not a resolution on at least some of these very important matters, confidence will erode quickly and negatively impact business and consumer spending. We are already witnessing a slowdown in high-priced real estate markets, and the unsettling seesawing in the equities markets has investors on high alert.

As of late, the retreat of the 10-year Treasury bond yield may be an early warning sign that the narrative about our own U.S. economy is changing, as well as the global growth narrative. Rates have broken lower from around 3.25% to now under 3.07%. The move lower on the 10-year Treasury bond has also further flattened the yield curve, which is being closely watched as it moves closer to inversion. An inverted yield curve is one of the key recessionary signals monitored by market watchers.

This was a dramatic week for the markets: oil fell, possibly triggering a bond rally, bond yields fell (even with inflation moving up and reaching the Fed’s 2% target). Core inflation readings may cool in the near future should oil remain lower. Copper, known for its economic forecasting ability, also has traded poorly, yet another sign that the global economy is slowing. Housing fell off this week, further helping interest rates. This makes one wonder how much higher, if, at all, interest rates can go, and I wonder if this is the peak. Keep an eye on the U.S. dollar, which has been on a tear. U.S. dollar fluctuations will also impact interest rates.

With this in mind, we are biased toward floating interest rates to see what happens over the coming weeks. Our feeling remains that interest rates may move higher, but the markets seem to like ~3 10-year Treasury yields, and we think we may see rates touch down to these levels. With housing and commercial real estate cooling off and a very volatile stock market, rates may be pushed lower in the coming weeks.

The two most impactful market events this week were the mid-term elections and the Federal Reserve meeting, both of which yielded predictable outcomes. The market seemed to like the House election results, given the massive equity rally Wednesday. Thursday, the Fed kept rates flat and offered an upbeat assessment of the economy. All signs point to another rate hike in December, unless something fundamentally changes from now, which is unlikely.

In other news, the 10-year Treasury yield hit a 7-year high of 3.232% before settling back down. This is relevant since the 10-year Treasury is the benchmark for both consumers and companies who borrow money. There is ample support that higher rates are here to stay. Factors behind this include a strong U.S. economy, high consumer sentiment, rising inflation readings, and large-scale public government debt auctions in public markets.

Lenders remain aggressive with price in a bid to win over well-qualified borrowers. This has helped offset higher yields, but only for the most qualified borrowers. While we believe interest rates will rise over time, our sense is that longer-dated interest rates will be range-bound and we are slightly biased towards floating rates.