Market Commentary – 7/15/16

This week is a great example of how quickly investor sentiment can change with “risk on trading” coming at the expense of bonds.

U.S. treasury bonds and mortgage bond yields continue to move higher and are off from the best levels ever, as investors continue to shy away from the safety trade and consumer inflation starts to bubble.  The risk on trade has once again pushed stocks to record levels with the Dow closing yesterday at 18,506 and the S&P at 2,163.

Economic data showed that June Core Consumer Prices rose by 2.3% year-over-year, matching the hottest year-over-year rate since 2008. Core Consumer Prices rose 0.2% in June, which is in line with expectations.  While inflation remains in check and is by no means a threat at this time, we must pay attention to the incoming inflation numbers because an uptick in inflation will result in higher interest rates despite other bond-friendly external forces.

The 10-year U.S. Treasury note, presently at 1.57% is well off the best levels seen just a couple of weeks ago.  It would not surprise us to see the 10-year note retest and potentially make new closing yields in the not too distant future. Given the recent uptick in interest rates, we are biased toward floating interest rates at these current levels ever so cautiously.