Bonds Hiding From Inflation

Good morning everyone and happy Friday!

Yesterday, we talked about how this morning we were going to be getting inflation numbers and because it is a year over year number, it was going to show high. Because of this, we were holding a locking bias. We were right on the inflation number. The PCE core rate came in at 1.8%, a 29% increase from last year! However, despite this, Mortgage Backed Security pricing is better today, up 14 bps so far this morning. Why did this happen if inflations should be pushing MBS pricing the opposite way? Well, many investors are waiting to see 2% as the Core Rate because that is the number the Fed has held on to. Maybe it was a bit of relief to investors that the Core Rate didn’t start with a  2. Next month, because we will be looking at April of 2020, we can expect to see an even larger jump in the core rate – many saying 2.5%+.

In other news, Americans have a lot of money burning a hole in their pocket! Household income for the month of March came in 21.1% higher than February. Now, stimulus checks were sent out but this is the largest monthly gain the US has seen since 1959! If this was entirely due to stimulus, we would off seen the same spike with the other checks that went out. This month’s reading is largely due to the vaccine rollout and the reopening of the economy. The reopening also allowed consumers to increase spending because they have more certainty in the economy. With past stimulus checks, we saw a massive amount of money poured into savings and investment accounts. This month, we saw an increase in consumer spending.