Morning Jog

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Global equity markets are off to a great start this year, but sovereign bond investors are having no part of the renewed optimism. 10-year government bond yields are L.O.W. low…as in zero in Germany and negative in Japan. In a flashback to the summer of 2016, the nadir for global rates, there is over $10 trillion of debt trading at negative yields. The US stands as an aberration in the developed markets, with a whopping 2.5% yield on its 10-year bonds. Ignoring their equity investor brethren, bond investors see a different scenario unfolding, one of slow growth and deflation.

But despite this apparent dissonance in the economic outlook from the equity and bond markets, the two are integrally linked and low rates (and the expectation that they will remain that way) are one of the factors fueling the stock market rebound. Case in point: the housing sector, as the most obvious beneficiary.

Housing activity slowed significantly last year, as increasing real estate prices, coupled with higher mortgage rates, pushed affordability to the brink. Prices softened, transaction volumes slowed, and economists grew concerned about the impact of a slowing housing market on the economy. But the collective outlook for slower economic growth, between investors and central bankers alike, led to lower interest rates and helped ease some of the affordability concerns for homebuyers.

Rates on 30-year mortgages are down almost 1% from last year’s peak…


(Source: St. Louis Fed)


…leading to the highest number of mortgage applications in years:


(Source: Wall Street Journal)


And accordingly, housing stocks are outpacing the broad market advance by a good clip:


(Source: FactSet)


So, we can scratch the housing market from the list of concerns for now. On to the next one.

Enjoy your weekend.
Alex