Not much to report on this week with respect to economic news. The one headline that caught some attention was the diverging opinions within the Federal Reserve concerning the timing of a rate increase. There appears to be no clear message out of the Fed as to what will be the trigger for an increase in interest rates. The bond market had a muted response to the Fed Minutes as bonds are mildly off their lows from earlier in the week and fell range bound (1.500% to 1.600% on the 10-year U.S. Treasury note).

When it is all said and done, bond yields are all about inflation and economic data. We see little inflation at the moment (although WTI oil traded up $4 this week to barely over $48.00 per barrel) and we are keenly aware of the global economic troubles that are abound.

It sure feels like a goldilocks scenario with the market being stoked by low-to-negative interest rates, slow growth, and low inflation. That said, new highs were hit this week for the troika of the stock indexes. The U.S. 10-year Treasury closed at a touch under 1.500%.

The ongoing benefits of massive global central bank stimulus include low debt in all sectors, including mortgages. As low as interest rates are in the United States, we may see interest rates go lower especially when considering 10-year Italian Treasury bonds are trading for .500%, a full percentage point lower than U.S. government debt. Go figure.

The downside to low rates is bank margin compression. That is one reason why we continue to remain biased toward locking in interest rates at these levels.

U.S. Bonds responded as expected with yields rising modestly in response to a very healthy June jobs report. The June jobs report saw an additional 255,000 jobs created above the 185,000 expected. The closely watched U-6 number, or the total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, rose to 9.7% from 9.6%. For reference, the U6 number was 10.4% in July 2015. The Labor Force Participation Rate (LFPR) rose to 62.8 from 62.7 and is a measure of the active portion of an economy’s labor force.

Globally, the UK surprised the markets on Thursday by lowering the overnight lending interest rate plus re-starting their QE program. This is in response to the overall poor economy in the European Union and the recent Brexit vote.

With so much of the world’s government debt yielding negative interest rates, the U.S. interest rates are high relatively to those of weaker countries. Therefore, even with a strong U.S. job’s report, we are modestly biased to floating interest rates at current levels.

This week is a great example of how quickly investor sentiment can change with “risk on trading” coming at the expense of bonds.

U.S. treasury bonds and mortgage bond yields continue to move higher and are off from the best levels ever, as investors continue to shy away from the safety trade and consumer inflation starts to bubble.  The risk on trade has once again pushed stocks to record levels with the Dow closing yesterday at 18,506 and the S&P at 2,163.

Economic data showed that June Core Consumer Prices rose by 2.3% year-over-year, matching the hottest year-over-year rate since 2008. Core Consumer Prices rose 0.2% in June, which is in line with expectations.  While inflation remains in check and is by no means a threat at this time, we must pay attention to the incoming inflation numbers because an uptick in inflation will result in higher interest rates despite other bond-friendly external forces.

The 10-year U.S. Treasury note, presently at 1.57% is well off the best levels seen just a couple of weeks ago.  It would not surprise us to see the 10-year note retest and potentially make new closing yields in the not too distant future. Given the recent uptick in interest rates, we are biased toward floating interest rates at these current levels ever so cautiously.

Rates remain at historical lows, and given the negative interests globally, US government bond yields are still high relative to global bond yields in Europe and Japan. On the jobs front, the month of June saw 287K jobs created in June versus the expected 175K with total unemployment at 4.9%, a slight rise from May. Within the jobs report, the closely followed U6 number fell to 9.6% from 9.7%. The U6 number is calculated by adding up the total unemployed plus all people marginally part of the labor force, plus total employed part-time as a percentage of the total civilian labor pool. This number is closely followed by economists. The labor force participation rate edged up to 62.7% from 62.6%, but is down significantly from the last decade and remains at multi-decade lows.

Banks are feeling the pinch with the compressing of the yield curve, as well as with the extraordinary low interest rates both domestically and abroad. Near-zero and negative interest rates are also affecting pension funds and insurance companies as it’s becoming more difficult to find yields to match long-term obligations. Banks are very hesitant to lower rates further since deposit rates are so close to zero, and they can no longer maintain deposit spreads.

While it would not surprise us to see movement in the 10-year US Treasury yield either up to 1.550% or down to 1.250% from the current yield of 1.374%, we are aggressively advising clients to lock in interest rates at these levels.

What a difference a week makes! Global equities rebounded throughout this week. The stock markets surged on what may have been an over-reaction to “Brexit”.

Last Friday was a vicious week for global equities as markets dropped in response to the unexpected vote by the United Kingdom to leave the European Union. This was all to the benefit of bonds as yields plunged both in the United States and abroad. How all of this works out is anyone’s guess, but, mortgage interest rates benefited from falling yields.

Uncertainty is very friendly for bonds. With so many complex issues surrounding the marketplace, we are biased toward U.S. bond yields going lower. However, it is hard to argue with locking in rates with the 10-year U.S. note trading near 1.400%.

Have a great 4th of July!

Global equity markets crashed Friday morning in response to the unexpected exit vote from the European Union (EU) by the United Kingdom (UK). This took the markets by complete surprise, in contrast to the sample polling conducted prior to the vote. Global bond yields fell sharply as investors sought the safe haven of bonds. No one knows for certain how this UK vote to leave the EU will affect the global economy long term, but the fear is that other European Union countries such as Germany and Italy will also want to leave the EU and this is not good for the global economy.

This uncertainty is the enemy of stocks but the friend of bonds and we could see more volatility and lower interest rates over the next several weeks as this exit vote plays out.

We continue to remain biased toward locking in interest rates for a few reasons:

1. Many lenders are resisting lowering interest rates as bank margins are already severely compressed.
2. It is too hard to time the interest rate market with so many complex market moving events.
3. We know the Fed would like to raise interest rates even though they cannot do so at the moment.

The Fed has used most of its monetary policy tools to stoke the economy with tepid results. Increasing interest rates will provide the Fed more ammunition to combat the next recession.

Global bonds cheered dovish statements made early in the week by the Federal Reserve which saw the German 10-year note go negative, the Japanese 10-year note go further negative and the U.S. 10-year note dip to around 1.50% in response to the Fed’s comments about the sluggish economy and future interest rate increases.

The reason for the drop in interest rates include fears of a slowing global economy, the United Kingdom’s potential exit from the European Union, and the flight to safety that investors are seeking in a very complex, globally integrated world.

With interest rates so low, it is hard to not recommend locking in loans. Therefore, we remain biased toward locking for two reasons. First, interest rates are very attractive so there is no shame in locking in at these levels even with the possibility that yields still may go lower. Second, banks are struggling with such low interest rates, which is compressing their margins and some lenders are resisting the urge to lower rates further.

The prospect of negative interest rates in Europe and Japan continue to drive high demand for U.S. bonds. Even with the 10-year U.S. Treasury dipping to around 1.65%, our interest rates in comparison to Europe and Japan are very attractive (the Japanese 10-year note is currently negative – WOW!). The reasons behind negative interest rates are not encouraging: anemic economic growth, deflation fears, declining earnings growth, and the lack of inflation. It seems that no matter what global central bankers attempt to do to stimulate the world economy, the results are muted.

For our purposes, the extraordinarily low interest rates have helped spur real estate transactions. Yet the long-term impact of such low interest rates does concern some of the experts as valuations of all asset classes reach all time highs.

With the 10-year U.S. Treasury trading at current levels, we are biased toward locking in interest rates at these low yields. However, it would not surprise us to see interest rates in the U.S. to continue to go lower.