Market Commentary – 10/14/16

Mortgage and U.S. Treasuries traded poorly this week with the 10-year U.S. Treasury closing over 1.80%. Last week we advised that we were closely watching the 10-year Treasury and that a break-out over 1.75% could mean that the 10-year Treasury could climb over to over 2.00%. Fed Chair Janet Yellen suggested she might let inflation “run hot” for a while, triggering a rate spike. Madam Yellen’s comments were not received well, and inflation is the arch-enemy of bonds, thus fueling the rate increase today. Furthermore, other Federal Reserve members have mentioned that we might reasonably expect a rate hike by the end of the year.

With rates still near historical lows, we continue to be biased toward locking in interest rates. At least for the moment, higher rates remain a possibility in government, mortgage, and corporate debt. However, we do not envision runaway interest rates given the ongoing economic and geopolitical risks around the world, not to mention the turbulence around our own upcoming presidential election.