The bond market woke up this week as interest rates rose swiftly. The 10-year Treasury traded over 1.500%, a level the pundits believed was years away not too long ago. The rise in rates is due to an improving economy, a slowing of cases, and hospitalization from Covid-19. Also pushing bond yields higher is the massive spending out of Washington and concerns of QE forever. The current $1.9 trillion fiscal package is still being negotiated. There are some concerns that the package includes some earmarks that have nothing to do with pandemic relief. The bond market would like to see a little less money printing. If Congress can agree to trim the stimulus package, this will help rates settle and they could focus the spending on those most in need. This won’t be easy, but Congress unified for the common good would be a welcome sight.
The Fed has stated it has the tools to manage inflation if inflation runs hotter than expected. Not everyone is convinced. Personal consumption surged in January. Inflation remains under control for the moment, but there are signs it is heating up. Key commodities such as oil, lumber, copper, and food prices are all higher than in previous months.
Extraordinarily low interest rates have boosted the housing market. It will be interesting to see how a rising rate environment will impact housing if rates continue to push higher. However, we need to keep in perspective that interest rates remain very low historically and that the reason that rates are moving higher is partially due to optimism for better days ahead.