Long-term Treasury yields rose in response to ongoing confidence in the U.S. economy. The 10-year Treasury note breached the 3.00% mark this week for the first time in more than four years. The significance of the 10-year rising above 3.00% is that it supports a strong economy and suggests the U.S. is healing and now prospering after the worst financial crisis since the Great Depression, even as some economists believe that the U.S. economy is in the late stages of expansion.
The rise in rates across the yield curve is a response to both the current forecasts by the Federal Reserve of at least three more Fed Funds increases (which would bring short-term rates) from 1.75% up to 2.25% to 2.500% and the sense that wage and consumer inflation may be on the horizon. Further supporting higher interest rates are talks in Europe about the pullback in bond purchases by the ECB, known as QE (“quantitative easing”).
In economic news, the first read on Q1 2018 GDP came in at 2.30% versus the 2.10% expected and down from 2.90% in the final quarter of 2017. Within the report, it showed that consumer spending rose just 1.1% from the lofty 4% gain the in the fourth quarter. Inflation data within the numbers were a bit hotter than expected. If today’s 2.3% GDP reading remains as intact as the final reading, the forecast for 2018 GDP growth is near 3.00%. This is good news for the economy and bad news for bond yields.
With the 10-year Treasury note near 3.00%, we are biased toward locking-in interest rates, but can also make the argument for a small dip in rates given the psychological significance of the 10-year Treasury breaking and closing above 3.00% this week.