Tame Inflation Helps Bond Prices

Stocks are continuing to push higher, as the upward trend in stock prices continue to move closer to all-time high levels. This technical move has created a headwind for mortgage bonds and has pushed mortgage interest rates up to within striking distance of multi-year high levels, which we will see unless bond prices stabilize soon. I’d like to see bond prices at least form a sideways trading pattern and get off the downward trend in which they are currently trapped.

The Consumer Price Index (CPI) report showed that inflation on the consumer level rose by 0.2% last month, which was below the 0.3% anticipated by the markets. Although this was still a healthy rate of increase, the bond market celebrated the news that it was below what was expected. Further, the annualized year over year rate dropped from 2.9% down to 2.7%, which is a healthy fall and again news that was celebrated by bond investors.

Another financial powerhouse has released their opinion as to when the next financial crisis will hit, and once again it is predicted to be 2020. They expect the downturn to be significant, with the recovery having a bit of a wild card. One major difference between the overall market now vs back in 2008 is that there are far more passive investments these days. Many are just buying into funds that will perform based on the performance of the S&P, for example, vs buying a company’s stock directly. This could add a challenge to the recovery as the lack of investments into direct stocks is something we haven’t faced in prior downturns.

As far as real estate is concerned, it seems to me as if we are in the equivalent of 2005. Everything seems wonderful and there is very little talk of real estate values facing a downturn. Although it’s hard to say how real estate will perform through the next recession, it is something to consider.

We will maintain our locking bias.