Mortgage and U.S. Treasury yields rose slightly this week in response to less-than-expected destruction from the double whammy of Hurricanes Harvey and Irma, in conjunction with improving inflation data. The markets continue to discount ballistic missile tests by North Korea with little to no negative responses to this geopolitical risk as evidenced by the S&P closing at a record high on Friday.
The big economic news this week was nascent signs of a pick-up in inflation. As written previously, the lack of inflation continues to perplex the Federal Reserve given the rate of unemployment of 4.500%, the longevity of our economic recovery, and the high prices of equities and real estate. The lack of inflation has kept interest rates low, which has benefited equities and real estate. It’s clear that Federal Reserve wants to continue to raise short-term interest rates to stave off a potential stock and real estate bubble, but it is less clear precisely when they will next hike rates.
At this time, we continue to remain biased toward locking-in interest rates given the improving economy, a potential rise in inflation, and attractive interest rates.