Surprisingly, the stock market has continued to rally around the unpredictable political environment in Washington. Bonds yields have moved up as global central bankers continue to discuss the improving global economy, and the need to re-adjust the ultra-low interest rate policies we have all become accustomed to.
Economic growth improved in the second quarter, but the 2.6% reading combined with the 1.2% in the first quarter, is still reflecting a 2% annual growth rate. Given how much stimulus has been thrown at growth, one would think our economy would be doing much better. This low growth rate has benefited bond yields and is one reason we have not seen higher interest rates to date.
The inflation-reading Employment Cost Index rose 0.5% in Q2, from 0.6% in Q1, and measures workers’ wages and benefits. From a year earlier, total compensation rose 2.4%, while wages were up 2.3% from a year ago. The lack of wage growth continues to be a tailwind for low rates. If wages don’t grow, inflation typically remains stagnant, as we have seen for a long time. This too is good news for Bonds.
The second and final read on July Consumer Sentiment came in at 93.4 versus the final read of 95.1 in June. The first reading for July was 93.1. This also supports Bond prices. The yield on the 10-year Treasury Note is well off the worst overnight levels and hovers near 2.30%.
We continue to believe interest rates can move higher and believe locking-in interest rates is a good idea given the posture of the Federal Reserve and their desire to move interest rates up. However, we do believe the rise in yields will be gradual and somewhat predictable.