The average rate on a 30-year fixed mortgage rose last week to just over 2.8%, the highest reading since November of 2020. The increase in rates may put a damper on further refinance plans by homeowners, but the Federal Reserve Chairman Jerome Powell recently made it clear to the markets that the Fed plans to maintain its easy-money policies for the foreseeable future. At the very least, until the economy shows greater signs of recovery from the coronavirus pandemic.
As recently reported in the Wall Street Journal, Powell stated that: “The economy is a long way from our employment and inflation goals. The Fed will therefore continue to support the economy with near-zero interest rates and large-scale asset purchases until substantial further progress has been made, a standard that Mr. Powell said is likely to take some time to achieve.” These statements came during his recent testimony to the Senate Banking Committee.
With easy-money government policies firmly in place, it is difficult to imagine a situation in which mortgage rates continue to rise significantly. While this could be welcome news to many businesses and homeowners that need to borrow, investors seeking income-yielding assets will continue to be challenged.
While the US 10-year Treasury Note yield has increased recently, it is still trading near historically-low levels. Even investors in the high-yield corporate bond market are challenged to find income, with yields hovering near 4%. In this environment, there are not many viable options available for income seeking investors.
As stated in the article, “Consumer confidence in the U.S. rose in February for the second consecutive month as Americans grew more upbeat about current business and labor market conditions, the Conference Board reported Tuesday. Still, nearly a year after the crisis erupted in the U.S., the nation has about 10 million fewer payroll jobs than in February 2020. Inflation also remains below the Fed’s 2% goal, a long-running worry among policy makers.” Inflation is always a concern for the Fed and for investors alike. However, with 10 million fewer jobs than a year ago, and continued business closures, a significant spike in inflation and interest rates seems unlikely – at least, for the near term.
Governments around the globe have pumped substantial amounts of capital into their respective economies in the attempt to soften the blows suffered from the COVID19 crisis. With that much capital moving through the system, it would not be too surprising to see an uptick in inflation. However, inflation readings have been at historical lows for the better part of two decades. If inflation were to pick up, it would be coming from a very low starting point.
In fact, some government officials at the Fed believe that a gradual increase in inflation could actually be a positive. As Powell stated, “inflation could be somewhat volatile over the next year and might rise due to a potential burst of spending as the economy strengthens. But that, he said, would be a “good problem to have” in a world where economic and demographic forces have been pulling inflation down for a quarter of a century.“1
Whether we end up seeing an uptick in inflation and rates or not, the global economy still faces significant challenges as businesses begin to reopen, economies come back online, and global travel resumes. While consumer confidence has begun to improve, there is still a lot of work to be done. Investors seeking income yield for their portfolios will most likely continue to be challenged well into 2021.
Steve Sapourn is co-founder and portfolio manager at Aloha Capital. He specializes in designing low-risk portfolios that reliably out-perform benchmarks. Steve has managed alternative investments in a variety of asset classes for nearly 25 years. His accomplishments include creating and implementing quantitative trading strategies in the futures, stock, and volatility markets. He’s also served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies.