10-year bonds are driven by our economy as well as global economies, not to mention the other forces we don’t control. Domestically, the first quarter of 2015 was very weak, showing a contraction of -.2%. Current growth projections for the second quarter are at 2-2.8%. Data related to income, inflation, manufacturing and consumer spending is released weekly and closely watched by bond traders for signs of growth and weakness. Reports over the past month have been stronger for the most part, but that’s not to say they’ve been exuberant. The Federal Reserve, who controls interest rates, has been closely watching the state of the economy as they prepare to increase rates this year. With the data to date, most pundits are banking on the first increase to occur in September, followed by a second spike in December, for a total increase of .50%. Traditionally, a Fed hike will cause rates to go up, which creates volatility in the bond and stock markets. However, since we have been anticipating a rate hike for at least the past six months, the markets have already absorbed it by increasing rates, essentially pre-empting any move by the Fed. Hopefully, therefore, any hike by the Fed will be a less volatile event than it has been in the past. If the next wave of economic data shows signs of a weakening, the next hike will get pushed out. There are any number of reports that will be issued between now and September, so it’s more or less a wait-and-see for all of us.
And then there is the rest of the world to deal with. Greece, with it’s impending default, has had great impact on the markets, holding bond yields down on bad news days as money flees to the safe haven of treasuries. With European bonds yields so low, the US bond has been the primary beneficiary, but now that Germany’s yields have risen, they are considered another safe haven, which has caused our markets to suffer. Unlike at any other time, Germany’s bund has taken the driver’s seat, and our bonds are stuck reacting in a more or less knee jerk fashion. That will change over time, but for now, with Greece on hiatus, we’re following Germany’s lead. Lets not forget China either! Their stock market has weakened, and we’re watching to see if there’s a bear in the China shop.
So what does this all mean for rates for the balance of this year? I believe that rates will remain where they are today. However, if our economy begins to weaken from its current state, or if Greece actually defaults, rates are likely to fall back to January levels, and could even go lower. For our sake we always hope for a better economy here and around the world. Well, that is until we are ready to borrow money again…
Melissa Cohn founded The Manhattan Mortgage Company in 1985, which grew to be the largest mortgage company on the east coast. She has recently launched a new division of FMM and is creating a new breed of mortgage banking with the best rates combined with today’s technology. Visit her mortgage blog.