Rate Volatility Persists As Economy Gains Momentum
Bond yields moved marginally higher in the back half of the week as Wall Street worked through how to balance a strengthening economy against massive fiscal and monetary spending some experts believe will create an inflationary period last seen in the 1970s. The bond market is not totally buying the Fed’s assertion that inflation can run hot and then be tamed. Stimulus and transfer payments are in the trillions of dollars and we’re seeing tweaks to long-held mandates. This is an experiment in financial engineering the likes we have never seen domestically, nor globally. Who knows how far the Fed can push its powers to control inflation, keep rates low, while also helping the economy to create jobs. As the $3 billion infrastructure bill being passed along with potentially higher taxes, the back half of 2021 is shaping up to be very interesting.
The worries over inflation for the everyday person are most felt through the impacts of increased costs of lumber, oil, and food prices. These costs filter up to the costs of buying a home, driving and purchasing cars, and feeding our families. CPI data continues to support the notion of minimal inflation, which may be confounding for the average American. The relatively low levels of money velocity, many millions of still unemployed or underemployed, and the near-certainty of a tax hike, are all deflationary. These are part of the reason that the Fed is not worried about inflation (yet!), and why inflation readings remain low. For now, inflation is under control and that should cap how high bond yields rise.
All the stimulus put forth by the Fed and Congress have benefitted housing and housing-related activities. While there is much media chatter about higher interest rates, bear in mind that rates are still very low historically (remember the 1980s?) and banks remain eager to lend to qualified borrowers. There will not be a linear rise in rates, but we continue to keep an eye on Treasury yields with the 10-year trading well above 1.600%.
