Bonds had a surprisingly good close today given the commentary out of the Federal Reserve members. They reinforced their intentions to raise rates sooner rather later with a target of 3 rate hikes for 2017. The bond market may have been soothed by the Fed articulating that monetary policy will remain accommodative even in the face of gradually increasing short-term interest rates. The focus for now will be on how the equity and bond markets react to rising rates. So far the response has been muted, with U.S. equities performing at multi-year highs, and bond yield higher, but lower than some might think given the roaring rally in equities. It is important to note that inflation is beginning to percolate ever so slightly with inflationary signs coming out of Europe, the U.S., and Japan. If inflations picks up, interest rates will definitely rise higher.
Technically, we are biased toward carefully floating interest rates and are carefully watching the 10-year Treasury note as it is trading near 2.500%. Should the 10-year Treasury note close about 2.61%, this could be an ominous signal for bond yields.