The focus this week was on what is known by investment professionals as the 2-10 spread, which is the gap between short and long-term Treasuries. The gap between these two Treasuries is the narrowest it has been in almost ten years. What we know is that the odds of 3-4 rate hikes on short-term rates, known as the Fed Funds Rate, has increased and that this expected tightening of the money supply may be the cause of a flattening yield curve. The reason that a flattening yield curve needs to be monitored is that while a flattening of the yield curve is not that concerning, should the yield curve invert that inversion would be an ominous sign that a recession may be on the way. A flattening yield curve also hurts the economy as banks make money borrowing short-term and lending long-term. The margin they earn is a result of the spread between short-term and long-term rates.
Late in the week, the 10-year Treasury note moved higher which increased the 2-10 spread. Currently, the 10-year Treasury is yielding 2.94%, a big move from the start of the week which saw this note down to 2.82%. Give credit to the rise in rates to ongoing positive discussions with North Korea, the decreased threat of a trade war with the Chinese, and an overall strong economy.
On the housing front, home inventory remains scarce. We are seeing our lending partners continue to offer more nuanced programs for the self-employed and foreign buyer with attractive rates to accommodate the changing dynamics of the marketplace.
We remain cautious on rates as the line in the sand of 3.00% on the 10-year Treasury note is a concern for us. Given the decreased global risk and positive economic growth globally, we warn of the potential for higher interest rates in the absence of an unforeseen global or domestic shock.
