Market Update 1/10/2018
We have seen rates rise steadily since the start of 2018. Today is no different. Mortgage rates are set to open at their highest levels in over 8 months this morning
What is causing the move to higher rates?
Several factors are causing rates to move higher:
1) Inflation expectations on the rise: Commodity prices like oil, copper, and lumber are all on the rise pushing economists to raise their inflation targets for the year. As commodity prices rise, consumer prices will rise.
2) Bank of Japan (BOJ): The BOJ announced yesterday that they will scale back their purchases of longer-dated securities going forward as their economy strengthens. This puts pressure on global bond markets as it takes one more major buyer out of the market.
3) Bank of China (BOC): Senior Chinese officials publically announced yesterday that they are recommending lower purchases of U.S. Treasuries for their foreign exchange (FX) reserves. Now, this is not a done deal, it’s only a recommendation, but any hints of China slowing down their purchases of U.S. Treasuries will cause rates to rise. Currently, China is the single largest holder of U.S. Treasury debt.
4) European Central Bank (ECB): The ECB announced last month that they will continue their bond-buying program until September 2018 but at a reduced pace beginning in January. We are now in January so the ECB is buying less fixed-income assets which just adds to the glut of supply already around the globe
As you can see there is a combination of factors pushing global rates higher. The German 10 Year bond, aka German Bund, is trading at its highest levels since October. The U.S. 10 Year Note is trading at its highest level since March 2017. Current 10 Year yield is @ 2.59%.
Bottom line is the global growth story and higher commodity prices are leading investors to speculate that the world’s major central banks might withdraw their stimulus programs sooner rather than later.
Not helping us is the new supply of debt hitting the markets almost daily. Corporations are issuing more debt than anticipated before rates rise much further. Also, the U.S. is issuing more new debt this quarter than they have in any quarter over the past 9 years, partly to fund the new tax reform bill recently passed.
Important inflation data is released this week. We get the Producer Price Index (PPI) tomorrow and the Consumer Price Index (CPI) on Friday. Both are key inflation gauges that the Federal Reserve monitors closely and both numbers have major market-moving implications.
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