Over the last few weeks, we have seen interest rates decline slightly. What has been the catalyst to help rates improve? Let’s take a quick look. Interest rates are heavily affected by inflation. The higher inflation goes the worse rates get. Basically, inflation erodes the return on investment for long-term bond holders so when inflation rises, or is forecasted to rise, bond investors sell or purchase less. When that occurs bond pricing drops. When Bond pricing drops, interest rates increase.
The latest inflation reports have been showing some cooling inflation levels. The latest Personal Consumption Expenditure report, the Fed’s favorite gauge of inflation, showed that year over year, core inflation dropped to 3.7%. While this is still far above the Fed’s 2% target, it was a two-year low and the bond market reacted relatively positively causing rates to improve slightly.
There were other items/events that also helped rates to improve. There were two Employment reports, the ADP and the BLS, which both showed lower-than-expected job growth. The BLS also showed less wage-pressured inflation and a rising unemployment report. Bad news for the economy usually shows that investors lean toward their “flight to safety” and they usually purchase a larger amount of fixed-return investments versus more volatile stocks.
Lastly, the Federal Reserve had their second to last meeting and the results showed that they were leaving the Federal Funds Rate unchanged. This was expected, however during their press conference they also had a softer more accommodative, or dovish tone saying in so many words that since yields are elevated levels, there is no need to raise their rate to increase economic activity suppression. This helped keep mortgage rates subdued and pointed lower as well.
In a nutshell, bonds are trading on an upward trend (good for rates) so far since the latest data releases have been in favor of a weakening economy and a slightly looser Fed. If this trend continues, we could be on our way towards much lower rates in the future.
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By: Jon Iacono