Inflation Continues to Cool

Mortgage bonds continue to slowly lose value, as the short-term minor correction pressures mortgage interest rate pricing higher.

News of the morning included the Fed’s favorite gauge of inflation, the Personal Consumption Expenditures (PCE) report, which showed that inflation cooled once again in the month of February. The all-in inflation headline number fell from 1.8% down to 1.4%. The Core Rate, which strips out food and energy prices also fell, going from 2.0% down to 1.8%. This is clearly good news for mortgage interest rates, and a key indicator that the Fed has grossly underestimated the overall strength of the US economy and the anticipated rate of inflation. This has been a strong driver of the Fed backing off the three anticipated rate hikes in 2019.

The 10-Year Treasury Note yield has broken above the critical level at 2.41%, and now technically has a clear run higher up to 2.57%. It’s far too early to predict this will happen. However, it is a risk and something we need to closely monitor. With the tame inflation report, we would have expected to see yields falling. But since that isn’t happening so far, now is the time to be cautious.

Given the downward pressure on bond prices, we will maintain a locking bias.