May 232017
 

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By G. Steven Bray

There’s nothing like a little political hysteria to get the bond market rallying. Last week’s impeachment headlines dropped mortgage rates to the lows for the year. Of course, as the silliness faded into reality, rates edged back up. Where they go from here depends on several factors.

First and foremost is Washington drama. If additional leaks reignite last week’s panic, rates could rally further; however, with the appointment of the special counsel, I think that source of inspiration has been muted.

Recent economic data, especially inflation data, has been rate friendly. Notably, the core consumer price index in Apr fell below 2% again, which is the Fed’s stated target. That may reduce the urgency of the Fed to raise short term interest rates.

Overseas headlines, like the terror attack in the UK, can create momentum for lower rates, but based on recent experience, it would take an extreme headline to break the market’s focus on our final factor.

That factor is expectations for the Trump agenda. Markets seem once again to be focused on the prospects for tax and regulatory reform. In particular, equity markets are banking on a lower corporate tax rate, and if Congress is able to make headway on this issue, the “risk off” trade should pressure rates back up into the range they’ve occupied most of this year.

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