In the past week, we witnessed a global inflow into the safe haven U.S. bond market as yields fell precipitously in response to the turmoil in Italian politics. Italy, as much of Southern Europe, has witnessed anemic growth for almost a decade, still has high unemployment rates, not to mention displaced workers and migrants, all of which has spurred a rise in populism. Thankfully, the fears of a new anti-Euro Italian government were quickly squashed but not before denting the stock market and catching some bond managers off-guard who had placed bets on higher interest rates globally. This week’s issues in Europe support the argument as to why our own interest rates in the U.S. may be capped as we are reminded of the flawed nature of the European Union (think Brexit) and the global implications of even the thought of dismantling the European Union would have on the world economies.
Back in the U.S., jobs are strong and the economy is robust. At least that is how the May Jobs report played out with unemployment touching an 18-year low at 3.8%.
There were 223,000 new jobs created above the 190,000 expected. May hourly payroll increased .3% in line with expectations, and for the time being, is not flashing any real wage inflation signals. Labor Force Participation fell a tick to 62.70%. Bonds responded as expected given the strong jobs report with the 10-year Treasury note closing at 2.900% up from the low of the week of 2.818%.
Housing supply also remains tight due to strong demand and a lack of inventory. At the moment, the U.S. economy is in a Goldilocks environment with a strong business sentiment, low-interest rates, and many jobs and employment opportunities available. Even tough talk from U.S. policymakers on global tariffs did little to unhinge the bond and equity markets. As we have opined previously, the only real threats to the markets currently are geopolitical, which were on display briefly mid-week, but were quickly dispatched.
We remain biased toward locking in interest rates at current levels. Should interest rates rise above 3.25% on the 10-year Treasury, we would see reasons to float interest rates, but given the strength of the U.S. economy and where interest rates are trading currently, we feel locking-in is the right move.