Bond yields were muted this morning despite airstrikes in Syria yesterday and an underwhelming Jobs Report. One would think bond yields would fall given this combination of circumstances.

We will start with the jobs report.

The most recent Jobs Report notes that only 98,000 new workers were added in March, well below the 180,000 expected, while January and February readings were revised lower by a total of 38,000 jobs. The Unemployment Rate declined to 4.5% from 4.7% and below the 4.7% expected with Average Hourly Earnings rising only 0.2% versus the 0.3% expected. The Labor Force Participation Rate (which is a broader measure of employment) remained at 63%, a multi-decade low.

The significance of March’s punk Jobs Report is how it will affect the Fed’s interest rate forecast. The March jobs data does not support additional rate hikes and may give pause to the recent suggestions by the Federal Open Market Committee that 3 to 4 rate hikes are in order. Furthermore, the poor data within the jobs report supports the need for tax reform along with infrastructure spending in order to boost the economy.

Now on to Syria.

The U.S. launched a missile strike on Syria last night. U.S. officials described this as a one-off attack that would not lead to wider escalation. Typically, we would see bond yields drop in the face of such action, but we live in unusual times at the moment.

In closing, the U.S. bond market remains focused on President Trump’s economic policy reform which is unfriendly news for bond yields, and one big reason why U.S. bond yields are not trading as expected. Therefore, we continue to be cautious. This week, we are biased toward locking in interest rates at current trading levels. Should we see the 10-year Treasury break below 2.300%, we may see interest rates move lower.

Bonds are set to close out the week nearly unchanged. The stock market strung together a couple of good trading days even against the background noise of Trump’s healthcare reform getting punted. To date, the stock market remains resilient even in light of the failure of Trump’s administration to pass his pre-election promise of healthcare reform.

Currently, the stock market is trading higher on the assumption that tax reform will pass. If Congress does not approve Trump’s tax reform proposals, expect interest rates to move lower and the stock market will likely become increasingly volatile.

In economic news, inflation remains in check just below the Fed’s target range. The Core PCE, the Fed’s favorite inflation gauge, rose 1.8% year-over-year in February from 1.7% in January and sits just below the 2% target range. The Fed has intimated that it is comfortable with Core PCE reaching or, exceeding the 2% target rate. If inflation stalls here, it will be tough for the Fed to justify hiking rates since that tactic is typically used to stave off inflation. Only time will tell where rates go from here. There is momentum for higher interest rates although we can envision several arguments for lower interest rates based on the current state of global and geopolitical conditions, ie. Brexit, North Korea, a potential recession, etc.

The current state of the economy might suggest locking in interest rates, but we remain slightly biased toward floating rates at these levels and watching to see if the important 10-year U.S. Treasury note will touch down to 2.25% or if it will move higher above 2.500%.

Bond yields inched higher this week after a very strong rally after last week’s Fed meeting. The combination of increasing inflation data and strong employment levels yield the prospect of higher rates on the horizon. Lower interest rates remain a wild card, dependent on whether or not the Trump administration can push through their agenda through Congress.

The withdrawal of Trump’s health care reform bill from the Republican-controlled house late Friday sent stocks lower in late trading. As of this article, it seems unlikely that this bill will pass, which is a reminder of the difficulty Trump may have with the next big thing on his agenda, his controversial tax reform plan.

Bonds should benefit from this uncertainty while stocks may struggle to go higher in the face of this in-fighting. Only time will tell.

With the 10-year Treasury note at 2.410%, we are biased toward locking in interest rates at these levels, which remain quite attractive.

There were no surprises this mid-week out of the Federal Open Market Committee (FOMC). As expected, the FOMC raised short-term interest rates (aka the Federal Funds Rate) by .25%. The Fed Funds Rate is now .75% to 1.00%. Fed Chair Janet Yellen’s dovish commentary was the buzz of this recent FOMC meeting, spurring a rally in U.S. Treasury and mortgage bonds. Prior to this meeting, it was generally expected that rates would be raised in response to the strong economy, and this is indeed what we saw. While Ms. Yellen did comment on improving economic conditions, the bond market was comforted by the Fed’s plans to raise interest rates incrementally over time. Prior to the FOMC meeting, the 10-year Treasury note which was trading over 2.600%. Post-meeting, it closed the week out at 2.500% on the button. Mortgage lenders adjusted pricing for the better toward the end of the week.

In other news, inflation remains under control while rising slightly, and housing starts hit a four month high, which is a sign of greater confidence in the U.S. economy.

With the FOMC meeting in the rearview mirror, we are cautiously optimistic that interest rates could drop a bit lower. We envision that the 10-year Treasury note may trade down to 2.25%, but we are also closely tracking rates as a move above 2.62% on the 10-year Treasury note could mean much higher interest rates for mortgages.

The strong February jobs report all but confirms that the Federal Reserve will raise short-term interest rates next week with 235,000 new jobs created versus 188,000 expected. Overall, this was a very good report with the unemployment rate dropping to 4.70%, improved income year over year, and the labor force participation rate rising to 63%, the highest in a year.

All eyes were on the 10-year Treasury note, which closed the week at 2.570% and has been flirting with the critical 2.600% yield threshold that the best and brightest on Wall Street believe to be the line in the sand for higher interest rates. What this means is that should the 10-year Treasury note close above 2.600%, the 30-year bond bull market is over. It certainly feels as if the “animal spirits” have returned with the so-called Trump Bump in equities pushing all asset classes higher at the expense of worsening bond yields.

While we see many indications that interest rates may rise, we are also aware that many government bond yields in Europe and Japan remain in negative territory, which may be keeping domestic interest rates from going much higher. With that in mind, we remain cautious but biased toward floating in interest rates while the 10-year Treasury remains under 2.600%.

Bonds had a surprisingly good close today given the commentary out of the Federal Reserve members. They reinforced their intentions to raise rates sooner rather later with a target of 3 rate hikes for 2017. The bond market may have been soothed by the Fed articulating that monetary policy will remain accommodative even in the face of gradually increasing short-term interest rates. The focus for now will be on how the equity and bond markets react to rising rates. So far the response has been muted, with U.S. equities performing at multi-year highs, and bond yield higher, but lower than some might think given the roaring rally in equities. It is important to note that inflation is beginning to percolate ever so slightly with inflationary signs coming out of Europe, the U.S., and Japan. If inflations picks up, interest rates will definitely rise higher.

Technically, we are biased toward carefully floating interest rates and are carefully watching the 10-year Treasury note as it is trading near 2.500%. Should the 10-year Treasury note close about 2.61%, this could be an ominous signal for bond yields.

U.S. bond yields rallied this week in response to several factors including uncertainty surrounding the French presidential election and the recent dovish language of the recent Fed minutes.

Why are bonds rallying when many believe that there is still room for rates to continue to climb? It seems as if the bond market does not fully buy into this recent equity rally, in which all major indexes are at all-time highs. Earlier in the month, Goldman Sachs stated that the market was trading at “maximum optimism”. Bond traders know instinctively that things don’t often go as planned. There are also mixed opinions as to whether the Fed will act in March and raise short term interest rates. If rates continue to remain low, bond traders may be in the process of adjusting their positions in response to this assumption.

We’re seeing more economic data that support a rise in inflation and predict continued low unemployment. Due to these factors, we are cautiously biased towards carefully floating interest rates with an eye toward locking at the first sign of a reversal of these lower rate trends.

Mortgage bonds remain range-bound as the 10-year U.S. Treasury note continues to trade this week between the 2.40% -2.52% range. Overall, bonds are trading well even in the face of multiple factors, including: a higher stock market (all major indexes are at all time highs), evidence of inflation as seen in the recent CPI report, solid regional manufacturing data, and the somewhat hawkish comments that came out of the Fed this week.

We wrote last week about banks’ tightening their interest rate margins in response to slowing mortgage demand. We continue to see this play out and believe this is a good reason to lock-in interest rates at these levels. The positive economic data supports higher interest rates which is evidenced by rising CPI, low unemployment, and high asset prices in real estate and in equities. When we consider the aforementioned issues with the potential (as yet to be unveiled) tax reform plan, then it is hard to argue for lower interest rates in the near term.

With interest rates still at historically attractive levels, we are biased toward locking-in rates given all of the data that suggests the potential for higher rates in the coming months.

Bonds yields are higher in response to continued positive trading in the U.S. stock market with all major indexes at record and or above record levels. Also, the announcement by Trump of “big league” tax reform juiced the equity markets yesterday and resulted in a sell-off in bonds which continued into today. If Wall Street responds positively to Trump’s tax policies when announced in a couple of weeks, then interest rates will rise. We have yet to see how effectively the Trump administration will implement new tax policies. However, the stock market continues to trade positively in response to Trump’s stated economic policies at the expense of bonds.

Given that rates are still very attractive, and banks’ loan origination volumes are slow, which typically results in tighter profit margin on loans, we remain biased to locking in interest rates at these levels.

In January, the U.S. jobs report was strong, and bond yields traded higher in response to this important monthly report. The government reported that U.S. employers added 227,000 new workers in January, above the 170,000 new jobs expected. The unemployment rate rose to 4.8% from 4.7% and the Labor Force Participation Rate (the number of people that are employed and or who are actively seeking work) rose to a four-month high of 62.9% from 62.7%. The U6 number (reflecting the number of part-time workers who’d prefer a full-time position and people who want to work but have given up looking came) in at 9.4%, up slightly from 9.2%.

As discussed previously, interest rates have moved up after the U.S. election in response to a belief that more pro-business policy under the Trump presidency will lead to higher wages and economic growth. So far, while interest rates have risen from multi-year lows, rates are still attractive. These low interest rates will continue to fuel home sales, which is important to the U.S. economy. We continue to monitor interest rates very closely, especially the 10-year U.S. Treasury which is trading at ~2.490%. Key for mortgage rates is that the 10-year U.S. Treasury remains below 3.000%. It would be even better if it remains below 2.500%, which is an important psychological threshold for many investors and borrowers.

We remain biased toward locking in interest rates for clients due to the continued pro-business rhetoric from Washington which could cause rates to move higher and without warning.