Halyard’s Weekly Wrap – 03/25/22

The vicious bear market in bonds that began last fall continued this week with the 2-year Treasury note touching 2.33% this afternoon.  Recall that the 2-year note closed last week just below 2.00%.  Fed speakers were again the driver of the selloff, strongly suggesting a 50 basis point hike at the May 4th FOMC meeting and potentially another 50 basis point at the June 15th meeting.  Citibank is forecasting four 50 basis point hikes this year, while Goldman Sachs is expecting that the 2-year note will end the year at 2.90%.  Those forecasts and retail liquidation of their fixed income holdings is behind the relentless selling.  Ironically, equity investors seem to be unfazed by the sharp selloff in fixed income.  Since hitting the low for the year in late February, the S&P 500 index has rallied nearly 10%.

Against that backdrop, the Pound Sterling and Euro traded sideways for the week, as FX traders speculated whether the Band of England and the European Central Bank will follow the Fed in their inflation fighting odyssey.  The same can’t be said for the Japanese currency which plunged in value versus the U.S. Dollar.  The Bank of Japan has communicated that a weaker Yen is positive for the Japanese economy and will not dissuade BOJ head Kuroda from continuing the Central Banks emergency monetary policy.

This was a fairly light week for economic releases, but the decline in home sales caught our attention.  Clearly the driver of the drop is rising mortgage rates.  The average 30-year mortgage rate climbed above 4.5%  this week.  We’ll be watching that sector closely, as it is a significant driver of the overall economy.   New home buyers are not bond traders, but they surely have noticed that when mortgage rates rose over the last few years, they did so temporarily and if the buyer or refinancer simply waited, they would be able to lock in at a lower rate.  That’s not likely to repeat itself in the foreseeable future.

Also of note was this morning’s release of the University of Michigan surveys.  The forward looking expected change in prices during the coming year rose to 5.4%, up from 4.9% last month and anecdotal evidence that consumer’s don’t believe the Fed’s newly adopted inflation fighting prowess will tame prices.

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