Inflation Tops 40 Year High & Bond Yields Jump
Mortgage rates have risen quickly. As we stated in our previous commentaries, once longer-dated bond yields begin to ascend from historically low levels, the outcome is violent given how quickly interest rates on mortgages move up. This has to do with the way bonds are calculated and the lower level of early payoffs from refinancing transactions as rates rise. The equity markets have also been hurt by rising rates and 40-year high consumer inflation readings. The Fed has admitted inflation is a bigger than expected problem and that it’s time to wind down QE measures by March, as well as start raising short-term interest rates. Thirty-year mortgage rates are now selling well above 3.25%, a dramatic move in percentage terms compared to only a few weeks ago. As inflation outpaces jobs gains, the rise in the cost of goods and services makes our country more vulnerable. From hourly workers to the elderly on a fixed income, inflation is a hidden tax. The Fed is behind the curve due to their extraordinary money printing policies enacted in part with Congress due to COVID-19. Prices in equities and real estate will adjust, but with so much liquidity in the system, we wouldn’t expect major down drifts in value.
Now, the good news. Inflation on the goods and service side is most likely not structural. Inflation readings should come down over the next 12-18 months. Also, interest rates are still very low. Should bond traders believe the economy is slowing, longer-dated interest rates may not go up that much further. Housing expense remains affordable due to low-interest rates even with housing prices at record highs. A cooling-off of high-risk trading (think crypto and meme stocks) may not be as bad as individuals reassess risk and reward. Finally, the economy remains strong with many millions of job openings. As the Omicron variant (which is more contagious but much less virulent) makes its way through our population, we may finally be able to put the pandemic in the rearview mirror. This should be good for spending and increasing overall economic productivity, as individuals come together again without concern of infection.
However, crosscurrents are everywhere. We are keeping a close eye on the Treasury yield curve, volatility indexes, and consumer confidence readings as signs for where we may go in the coming months. Follow the Fed has been good advice for a long time. We are actively contacting clients and encouraging them to apply for still very attractive loan terms, albeit off the all-time lows. Now is not the time to be complacent.
