Labor Market Strong: Yields Rise

A: Three weeks ago I wrote a post titled, "Interest Rate Talk Likely To Begin Again", based on rising inflation fears that I saw not going away. In the monetary world, interest rates adjust based on the state of the economy, price stability, and most importantly inflation pressures. In the real estate world, interest rates are directly tied to the affordability of property; the higher the rate, the more expensive money is to borrow, and the less a potential homeowner could afford. This is why I talk about this stuff here on UrbanDigs with the hopes of getting more exposure to the fundamentals that may ultimately affect real estate cycles. Understanding these concepts could help you make savvier investment decisions that leads to more money in your pocket!

In my post three weeks ago, I publicly stated that I thought the yield on the 10YR would start a run up towards 4.75%, from 4.54% at the time, based on inflation fears that are continuing to persist. The fed's primary job is to control inflation and price stability regardless of what the stock market and housing market are currently doing. Their secondary job is to NOT rattle the markets and to provide economic stimulus or constraint as they see fit; then they have some regulatory functions as well.

Here is what I said three weeks ago:

If I'm right, then in 4 weeks the 10YR Treasury yield will be at least 25 basis points (0.25%) higher.

Here are some reasons why I thought the yield on the 10YR Treasury would rise in the near term:

1. Fuel, Food Prices Push Higher
2. Wholesale Prices Shoot Higher

Unfortunately, I don't trade anymore because this would have been one nice little play. Here is what the 10YR Treasury Note has done since I wrote that post three weeks ago without taking into account todays reaction to the jobs report which made the yield surge to 4.74%:



The reason is because the economy, while showing signs of weakness, is still relatively strong. In particular, todays labor report presented very bullish data on the jobs market. A strong jobs market means a healthy US Economy, which means bye-bye to rate cut hopes and hello to more inflation pressures and possible rate hikes. Which is why yields on the 10 YR Treasure note are rising! Get it?

According to Yahoo Finance's article titled "Bonds Slide, Dollar Up After Jobs Report":

The yield on the benchmark 10-year Treasury note surged to 4.75 percent from 4.68 percent late Thursday. U.S. Treasury bond prices tumbled and yields rose in a holiday-shortened session Friday after the unemployment rate fell to a five-month low, signaling the economy could be stronger than expected.

The Labor Department report that employers increased their payrolls by 180,000 in March, the largest increase since December. Wall Street had been expecting an addition of about 135,000 jobs. In another positive sign for consumers, workers' pay also increased.

Now, you really have to look at these discussions from the big picture. Things change daily and while I am addicted to economic reports and whats going on in the bond market, equities markets, inflation world, etc..its very hard to make long term predictions/investments from what I am telling you. However, if you have recently signed a contract of sale and were waiting to lock in your rate, then this kind of reporting should motivate you to do so sooner rather than later! In addition, for those that don't understand what makes rates go up and down, these reports should shed some light on the subject.

UrbanDigs Says: Inflation is capable of doing way more damage than a recession. The best known medicine to control rising inflation is to RAISE interest rates and try to SLOW the economy. The hardest part of applying this medicine is getting it just right so as NOT to slow the economy too much forcing us into a recession. Right now, there are many inflation pressures (high commodity prices, strong labor market, rising wages, higher food prices, and a Core PCE # at 2.4% and ABOVE the fed's comfort zone of between 1-2%) that may not ease if the economy proves stronger than expected; and todays jobs report hints at that! The thing is, the fed is clearly counting on a soft landing where a slowing US economy will help ease inflation pressures without the need for more interest rate hikes. Well, if the economy doesn't slow as much as expected and inflation pressures continue to hover or rise in the near future, then rates MUST go higher to contain longer term damage! I'm very curious to see how high the yield on the 10YR will go to on this run and will continue to report on the macro factors that ultimately lead to policy change.

I am still on record for saying that one of the two fears I see towards keeping housing down for a while longer is weaker jobs later this year. I'm still standing behind this statement and worry that jobs reports in the months of Oct-Dec could come in weaker than expected showing a slowdown in the US economy.