Market Commentary 5/18/18

Higher interest rates were all the rage this week with the 10-year Treasury bond rising to a high close of 3.12% before retreating on Friday. We pay close attention to the 10-year Treasury because it underpins the pricing of various financial instruments from mortgages to corporate debt.

This upward trend in the 10-year Treasury pierced the psychologically important 3.00% threshold which may suggest higher interest rates in the future. The reason for the rise in rates is always complicated, but you can chalk higher rates up to strong earnings and a high level of confidence about the economy, the continued normalization of interest rate policy by the Fed, our huge deficits, and anticipation of QE ending in Europe come later this year. For the week, stocks and bonds shrugged off geopolitical tensions involving disarming North Korea, trade tariffs with China, and tensions in Italy.

With the housing market in full bloom, purchases remain strong and lenders continue to find more creative ways to finance home purchases. With interest rates still in the upper 3% to low 4% range, rates are still attractive historically. Given the above, we are biased toward higher interest rates in the coming months and believe locking-in rates is advisable.