The big news this week was a surprise Fed speech by Fed Governor Lael Brainard who is wildly considered the Fed’s most dovish official. These comments Friday morning, which surprised both the bond and equities market, resulted in a heavy sell-off in U.S. equities, as well as an increase in bond yields. With the world economies addicted to extraordinarily low yields, Friday was a perfect example of how sensitive our markets are to low interest rates and how volatile the markets may become if the Fed raises interest rates near term.
From abroad, a less dovish stance by the European Central Bank put further pressure on bond yields.
Economic reports remain mixed, so there will be a lot of discussion over the coming days as to what matrices the Fed Reserve is studying in deciding future rate movements. The Fed’s mandate is to support maximum employment and inflation. Based on these two indicators, one could argue that a rate hike is warranted. However, with the global economies so intertwined, one could also argue there’s a need to keep rates low for longer.
Given the spike in the 10-year Treasury yield from 1.500% to a Friday close of 1.67%, we are biased toward locking in loans. The next couple of weeks could be very volatile from both political and economic standpoints.