U.S. Treasuries and mortgage bonds closed in the red on Friday with yields worsening in response to some consumer reports that suggested inflation had increased a touch. August Core Personal Consumption (PCE), which strips out food and energy, rose 0.2%, up from 0.1% in July. Core PCE, the inflationary indicator favored by the Fed, increased from 1.60% to 1.70%. The Fed would like to see core inflation at 2.00% or higher. Further pressuring bonds was a very strong day on Wall Street with equities across the board trading nicely. Oil also had a good week of trading. Oil closed the week up trading over $48 per barrel.
As we enter the fourth quarter 2016, it will be interesting to see where rates head. There are many political and economic factors to think about: U.S. election, Japanese deflation, central bank easing, oil, low rates, etc. Based on this week’s trading, we continue to remain cautious and are biased toward locking in rates in the face of so much uncertainty.