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Market Update

From the Desk of Jason Obradovich, Chief Investment Officer

Market Update: January 11, 2018

Today we are going to talk about what is happening with interest rates.

As you've probably seen, longer-term interest rates and more specifically mortgage rates have been steadily climbing in the new year.

(show graph)  In fact, long-term treasury rates have been climbing since the beginning of September with the 10yr moving from 2.04% all the way up to almost 2.6% this week. 

Now you may be asking yourself why are longer-term rates moving up so rapidly?  There are a few things that should be noted. 

The first and foremost is the Federal Reserve raised interest rates three times in 2017 which pushed up short-term rates.  Long-term rates did not move higher as it was generally believed there would be no acceleration in growth or inflation in 2018.   However, if inflation materializes then that changes the outlook on long-term rates.

Secondly, we are starting to see a small uptick in Core PCE, that is to say, the Fed’s preferred inflation measurement.  It’s only been for two months and is still quite low, it has moved higher.  Another gauge of inflation is oil prices which are at the highest levels since 2014 and have been steadily rising for months. 

Next, we saw tax reform which is generally thought to be somewhat inflationary.  And last but not least, all of this has caused hesitation among Chinese investors who are said to be wary of longer-term US debt in the face of inflation.

When you combine all of this together with the expectation that the Federal Reserve will probably raise rates 2-3 times this year; it has put a lot of pressure on the 10yr which is up against this 2.6% level of resistance.  If the 10yr goes above and stays above 2.6% then it’s very possible it could move as high as 3% this year. 

In the coming weeks you should keep an eye on the following items:

  1. The 2.60% key resistance level on the 10yr

  2. More inflation data either confirms it is accelerating or is it purely temporary

  3. And last but certainly not least, the demand for long-term treasuries, which is the real driver or interest rates.

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