Market Commentary – 2/26/16

U.S. bonds are not having a particularly good day after a better-than-expected Personal Consumption Expenditures (PCE) reading, which excludes volatile food and energy. The PCE year-over-year reading came in at 1.70% which is approaching the Federal Reserve’s 2% inflation target.

Rising inflation indices are bad for bond yields and as expected, the U.S. bond market is responding with rising interest rates. Adding further pressure to bond yields was a poor 7-year U.S. Treasury Note auction which was met with tepid demand.

Other economic news Friday morning included the second reading of Q4 2015 GDP. This reading came in a bit better than initially stated with an upward revision to 1%.

Oil and stocks have had a good trading week and this is also adding pressure on interest rates. As money flows back into the equities markets and other “risk on” trades, interest rate yields tend to suffer.

Based on the current market conditions, we are biased toward floating interest rates as prices remain above technical support levels. However, we continue to float with caution.