We’ve been discussing this trend for weeks now on this blog, watching as the 10 Year nudged higher and higher all spring. But this week’s action is significant because most investors believe the 10 Year will now increase to yields of 3.2 percent before hitting another speed bump.
The 10-year Treasury rate is especially important given its role in helping set interest rates for a whole range of business and consumer loans, including home mortgages, which tend to follow the 10 Year yield.
The move higher was helped along by positive economic news suggesting continued economic strength in the U.S. Bond issuance is also increasing as federal budget deficits widen. But there seems to be no one single cause for the move higher. This suggests broad-based trends of higher inflation and continued growth that will keep bond yields increasing. Watch for mortgage rates to follow suit.
Investors reacted to the slate of news this week by increasing the odds of three more Federal Reserve rate hikes this year, which is higher than the Fed’s own estimates. Analysts now place the odds of three additional quarter-point hikes in 2018 above 50 percent.
Dallas Fed President Robert Kaplan, speaking Tuesday, said the central bank should lift rates gradually, and that when it comes to deciding on three or four hikes in 2018, he’d “rather make that judgment later in the year.”
The takeaway from this week’s market action must be further confirmation of the gradual increase in borrowing costs in the U.S. While volatility due to geopolitical risk is ever-present, there should be no doubt that economic growth, inflation, a more hawkish Fed and widening federal deficits among other factors are a compelling reason to expect Treasury yields, and in turn mortgage rates, to continue the slow climb higher this year.
Housing and retail spending
Among the positive economic news this week were reports that showed increased single-family housing starts and better-than-expected retail spending.
A government report on the housing market this week showed construction starts of single family homes increased by 0.1 percent in April, while multifamily construction decreased. Permits issued to builders for new single family homes also increased 0.9 percent in April.
While the overall report, combined with multifamily and commercial building, painted a picture of mixed results, the single-family numbers were a clear winner. While not enough to make a major dent in the low inventory we face in the housing market, it does show a market leaning in the right direction.
Meanwhile, a report on retail spending showed American consumers are spending more in the wake of tax cuts, full employment and modestly rising wages.
Retail sales rose 0.3 percent in April and prior months numbers were revised higher. The report showed more wintry-than-usual April weather didn’t slow down spending. Consumer spending on clothing and furniture led the way with increases of 1.4 and 0.8 percent, respectively.
The retail news, released Tuesday, beat most analyst assumptions and set the stage for the Treasury yield moves in the second half of the week.