Capital Markets Update

Yup, rates have moved higher. The U.S. economy is doing well, and, in addition, supply and demand shifts are moving rates as well. Investors are concerned about increased bond market supply (higher supply = lower bond prices = higher rates) due to fiscal spending initiatives. Spending typically stimulates the economy, and investors are concerned about rising growth and inflation, either of which are bad for rates. Investors are worried about the first group of investors and thus are making trades to try to get ahead of them, pushing rates higher.

Global monetary policy seems like it may be on the verge of a unified tightening, much like there was unified loosening in 2008-2015. A removal of policy accommodation means big central banks are buying fewer bonds. Lower demand for bonds = lower prices = higher rates. Finally, some traders are simply reacting to the momentum, selling bonds when rates rise above a certain threshold intraday (again, selling = higher rates), thus creating a snowball effect that pushes rates higher. Most rate sheets have 30-year fixed rates in the mid or high 4% level versus the 6% range we experienced in 2007 before the recession.

Looking back to Friday’s employment data, it once again showed strong job growth with 200,000 jobs added in January and the unemployment rate remained unchanged at 4.1 percent.  Although already lower than the level considered by many to be full employment, many expect the unemployment rate to decline further before bottoming out below 4 percent. Monthly employment has increased each month since October 2010 for a cumulative 17 million jobs added and the data continues to expectations that the Fed will increase rates in March. Another area of interest for policy makers has been wage inflation and Friday’s report showed that hourly earnings have increased 2.9% year-over-year which is the largest growth rate since 2009.

The 10-year Treasury note yield rose again to finish the week at 2.84 percent. Normally a down day in the equities markets would have trigger some buying in bonds, but both markets saw red on Friday.

In déjà vu, this Thursday is the deadline for lawmakers to reach a funding deal or face another shutdown. The calendar this week is not as busy as last week and kicks off with the PMI services Index and ISM Non-Manufacturing Index today. Additionally, today, the Fed will purchase $840 million in Ginnie Mae 3.0%, 3.5%, and 4.0% coupons. Tuesday sees International Trade data as well as Rebook Same-Store sales and job openings. Wednesday brings MBA mortgage applications, petroleum status report, a 10-yr note auction and Consumer Credit. Thursday has chain store sales and jobless claims and Friday finishes up the week with wholesale trade inventories. We begin the week with the 10-year yielding 2.84% and agency 30-year MBS prices are little changed from Friday’s close.