INSIGHTS

On June 11, 2018

AAM Viewpoints – Will Interest Rates Continue to Rise? Part 2

I wrote “AAM Viewpoints – Will Interest Rates Continue to Rise?” on April 23, 2018. At the time, the 10-Year U.S. Treasury Bond yielded a 2.97%. Since then, the 10-Year U.S. Treasury Bond hit a high yield of 3.11% on 5/17/2018, a low of a 2.78% on 5/29/2018 and currently sits at a 2.93%. That Viewpoints touched on a couple strong economic indicators being very positive for higher rates: the S&P GSCI Industrial Metals Index being at its highest in five years and the Initial Jobless Claims at its lowest in 40+ years.

We also talked about the Fed raising rates three more times this year and that the CPI (Consumer Price Index) was at a 2.4%. More importantly, the historical spreads between these two numbers – the Fed Funds rate and the CPI index – and the 10-Year Treasury Bond are abnormally tight and any reversion to the mean would increase yields on the 10-Year U.S. Treasury.

Another piece of data that would indicate to some that the economy is still hot with potential inflationary results is the JOLTS (Job Openings and Labor Turnover Survey) data. JOLTS is a survey done by the U.S. Bureau of Labor Statistics to help measure job vacancies. It collects data from employers including retailers, manufacturers and different offices each month.

The JOLTS Job Openings is the highest it has been since the turn of the century. Employers are hiring and the job market is strong.

Even stronger news: the JOLTS Quit Rates; the six-month moving average is near a high. More people are quitting jobs and finding new opportunities. Now it might appear to some that, in general, people do not switch jobs for a lower pay check. This, in itself, could be considered inflationary.

So, do we still think rates will rise in the future: Yes. So, if several key economic indicators are so positive, why are yields lower in the last couple months? Rates typically retrace and have short-term blips; but in the long run, rates – we believe – will rise. The latest strength in the Treasury markets had to do with the latest news with Italy and of course Iran and North Korea along with whatever other 10 “Breaking News” events that seem to appear daily. It seems that we are now in the state of “the latest news,” whether it is sensationalized or not, being more negative than positive. Headline negative news can cause a knee-jerk reaction that seems to drive the U.S. Treasury Bond markets stronger (lower yields) as investors seek a safe haven. Although the “tweet of the day” is impactful, the basic economic fundamentals, in our opinion, will carry the day; longer-term rates will rise eventually.

As usual, there are always two sides to every story and as always check with your financial advisor before investing.

CRN: 2018-0604-6692R