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By G. Steven Bray
The bond market is a little nervous. Since the election last fall, bond yields have been on a tear, assuming that the new administration would push through policies that would make the economy soar or at least push up inflation.
Last week’s health care bill fiasco was like electro-shock treatment. Markets realized that campaign fantasies are not equivalent to Washington realities, and it may take a significant amount of time for the proposed policies, in particular tax reform and government spending increases, to come to fruition.
The market reaction so far this week has followed the headlines. Monday, rates fell as investors fretted. Tuesday, rates rose as it seemed like the health care bill might rise again like a phoenix. On the whole, I do sense an at least a temporary return of cautious sentiment. Talking heads are discussing the difficulty of passing a tax reform bill, and an impasse there would be the ultimate disappointment to markets.
Floating your interest rate could be a reasonable plan this week, but be prepared to lock if rates start drifting higher again. The week is full of speeches by Federal Reserve governors, and any one of them could drop a bomb about rate hikes that upsets markets. In addition, Friday brings the Personal Consumption Expenditures index, one of the Fed’s favorite inflation metrics. A hot inflation reading could overcome cautious sentiment very quickly.