Hi, Bill Bodnar here from the Mortgage Market Guide. Thanks for tuning in for our MMG weekly recap.
So there’s a trend developing right now, or has developed, that we want to make you aware of
heading into the spring market. And there’s one word: It’s called complacency, so we’re going to talk about the charts and the price action because it really does highlight the complacent nature of the bond market.
Right now, you can see we are moving pretty much in a sideways trend. Volatility has gone away a lot.
And, we are right now again on the right side of the chart, right near 2019 highs as it relates to price, which is also a one-year high in price. At the same time watching stocks power higher, so you have this beautiful market of people’s 401(k)s and portfolios moving higher in value. And you have interest rates
moving sideways in a beautiful trend worldwide.
Let’s take a look back in October and November, the Fed was very hawkish, talking about hiking rates three times in 2019 reckless abandon. You know we talked about it and said it can’t happen. Well they did
a 180, and since December 24th stocks have been in a rally mode.
Why? Because the Fed you know they’re sitting on their hands right now waiting to see what happens with the global slowdown.
And then the second thing is inflation. We talk about inflation a lot. Inflation is the driver of interest rates. You can see after peaking out, this is CPI, you can see here in recent months that has ticked down. You can see the trend here in recent times is lower or the rate of inflation is slowing.
Disinflation is kind of kicking in, and we’re seeing that around the globe. So, there is a search of global
yield that makes the U.S. Treasury market kind of attractive compared to other bonds around the country. It also makes mortgage-backed securities rather attractive.
It also makes high yielding stocks attractive. So right now with low inflation, a Fed out of the picture, and interest rates stable that’s keeping stocks moving higher. It’s keeping bonds at an elevated level, but
it’s complacent for now.
What will be the trigger? What could change this story? It’s inflation. So that’s what we are watching, or wages. It’s the one piece that is starting to emerge that the Fed has always looked at and said, “Hmm, it would be nice to see wages grow.”
And they’re growing at around 3.4 percent year-over-year, the highest in a decade. And something we need to watch carefully, that if we get one inflation print higher sparked by wages, and it could certainly happen in months ahead.
This complacent trend will end like this [in an instant], so we need to be mindful in the months
ahead. We’re watching inflation carefully but right now it is low to non-existent threat and that is really
fueling this beautiful, complacent trend, and interest rates are moving sideways at the best levels of the year.