Inflation Concerns Build

Good morning everyone! I hope you had an awesome weekend.

Good news in the stock market this morning – the S&P is up over 2.4% as Treasury yields fall. We saw stocks retreat in the last week as Treasuries rallied. However, the momentum behind the J&J vaccine approval and the $1.9T stimulus bill being approved by the House forced yields down and stocks up.

The MBS market started off the day following Friday’s trend. Unfortunately, after being up 13 bps early this morning, they have taken a 32 bps swing and now sit down 19 bps. Like we have talked about in recent reports, this rise is largely coming from inflation concerns. The stock market is hot, the housing market is booming, unemployment is dropping, and many other factors are all driving inflation up and mortgage rates higher. Now, on Friday, we got the PCE reading which showed that investors may have thought rapid inflation growth was coming sooner than it is. They look at a year over year number that was well below the Fed’s target of 2%. However, as we get closer to the year mark of the beginning of the COVID shutdown where we saw negative inflation, those year over year reading are going to get much higher and may scare even more investors out of the bond market. For example, in April of last year, we saw a massive -.4% inflation fall. When compared with current projections of inflation, the reading will come in somewhere around 2.5% year over year. That is 25% above the Fed’s target, a very concerning headline for investors who my not be considering the relative position we were in a year ago.

We are still holding a locking bias.