Sharing Our Thoughts and Insights
For those looking to refinance their mortgage (or with children looking to purchase a new home) now may be a great time: the average 30-year, fixed rate mortgage now stands at around 3.56%, a three-year low.
The last week has seen a sharp reversal in the best and worst performing stocks. The stocks driving the market gains throughout the year have given way to the laggards over the last few trading sessions.
Economics 101 tells us that lower supply (all else equal) will result in higher prices. And that’s just what’s happened, as Municipal bond returns have outpaced taxable bond returns over the last ten years (4.1% to 3.9%).
The U.S. 10-Year Treasury Yield has been cut in half since the fourth-quarter last year (3.2% 1.6%), causing bond prices to rise significantly (taxable bond index is up nearly 9% year-to-date).
The financial world has been atwitter about the inversion of the yield curve. It is a phenomenon in the bond market in which longer-term interest rates fall below shorter-term interest rates, and has historically been a warning sign that a recession could be on the way.
The inversion of the yield curve (where short-term rates are higher than long-term rates) is one of the most reliable predictors of a recession. As it happens, the Treasury yield curve is currently inverted with the 10-Year yield (1.6%) well below that of the 3-Month yield (2.0%). So does that mean all signs are pointing to a recession?
Monetary policy (meaning the Federal Reserve lowering short-term interest rates) has become less effective at spurring economic growth in the recent past. One big reason may be the weakening link between company borrowing and company spending on capital expenditures, which is thought to be a major driver of economic growth.
With nearly half of the companies in the S&P 500 now paying a higher dividend yield than the 10-year Treasury rate, it’s tempting to sell bonds and buy high dividend stocks instead.
Under “unprecedented political pressure” and under the close eye of the stock market, the Fed is expected to cut rates by at least 25 basis points.