MARKET UPDATE 1/23/18
Since the beginning of the year, rates have been on a steady march higher. Concerns that inflation will rise and cause the Fed to raise rates more than forecasted and that other central banks, like the ECB and BOJ, will begin to aggressively unwind their quantitative easing policies, have been the catalyst behind the recent bond selloff.
Overnight, the head of the Bank of Japan (BOJ) Haruhiko Kuroda, publically said that the BOJ has no plans on exiting its stimulus programs with inflation nowhere close to its 2% target.
That statement gave global bond markets a kick start to lower rates this morning. Japan has been in a decade's long battle with deflation. Their deposit rate is actually negative. Their 10 Year Note is currently yielding 0.07% or close to zero. To fight deflation they have been aggressive buyers of their debt and their central bank has kept short-term rates negative.
Last week we heard rumors that the BOJ might be paring back their bond-buying which sent shock waves through all bond markets. Last night’s statement from Kuroda puts those rumors to rest.
The U.S. 10 year note is currently yielding 2.61% which is off its recent highs of 2.66%. The Federal Reserve can directly impact the short end of the curve when it raises or lowers the Fed Funds Rate, but it’s global central banks that are controlling the longer end of the curve with their stimulus and quantitative easing policies.
Mortgage rates yesterday opened at their highest levels in over a year. Today we are getting a reprieve as mortgage rates have slightly improved. Hopefully, this trend will continue.
The only major economic news coming out this week is Durable Goods orders and GDP figures for the 4th quarter this Friday. The U.S. Treasury is auctioning off 34bb new 5yr Notes tomorrow and 28bb new 7yr Notes on Thursday. Supply has been heavy so far this year with higher than expected corporate issuance and higher treasury auctions to fund to new tax bill. We will need to see how this new supply is received by the markets before making any meaningful attempts toward lower rates.
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