Concerns of a heating job market abated with January’s lackluster jobs report. Bond yields began to move up mid-week on a better than expected ADP report and weekly unemployment claims in anticipation of an improving jobs market. The 10-year U.S. Treasury did close above 1.15% for the week, but some of the rate momentum was lost due to slowing jobs numbers. The jobs market has certainly improved from last year, yet there still remains many headwinds. Job improvement is being seen in education, professional, and business services while hospitality, healthcare, and leisure remain underperforming sectors of the economy. The unemployment rate checked in at 6.30%, down from last month’s rate of 6.70%.
So what will drive rates in the coming months? We see (as do many) three main themes driving interest rates: (1) vaccinations and herd immunity (2) government spending and inflation and (3) business disruption and underemployment. Ultimately, the virus is in charge and will play the biggest role in the global economy’s re-opening and return to normalcy. More normal times portend higher interest rates. Massive quantitative easing, central bank stimulus, and government aid remain top of mind as well. Massive stimulus and government aid will eventually move interest rates higher as it becomes harder to see how all of this borrowing will be paid back. However, for the moment, the Fed is encouraging inflation. So far, it has created inflation in both the equity and real estate markets in the form of higher prices as a result of near-zero interest rates. The Fed is now hoping for wage inflation. While inflation has been feared over the last twenty years, this time may actually be different as the Fed vows to keep rates low even in an inflationary environment. Technological disruption and how business will be conducted post-pandemic also is playing a role. Tech disruption makes businesses more efficient but also costs jobs and in many ways creates deflation. Lack of full employment will force the Fed to keep interest rates low for longer, even after the pandemic passes.
Housing and housing-related activities have played a big role in keeping the economy moving forward during these most uncertain times. The pandemic has certainly created a once-in-a-lifetime opportunity to lock-in exceptionally low-interest rates. We continue to remain very busy and grateful for our clients. Over the last several months, there was really no need to watch the bond market. However, that is now changing as rates begin to tick up and the yield curve steepens. For the moment, the small uptick in interest rates should not alarm any active borrower, but it may become a bigger factor in the months ahead.