Markets: rates higher on inflation expectations
US Treasury yields moved up across the yield curve today with rising inflation expectations accounting for more than half of the move. Both 5- and 10-year yields rose nearly 5 bp with implied inflation in each maturity up 3 bp. Inflation as implied by the spread between 10-year TIPS and notes has jumped 15 bp since the FOMC last week revised its expectations for 2016 rates hikes from four to two. The market has begun to temper enthusiasm over falling Fed dots with expectation of rising inflation.
Richmond Fed President Jeffrey Lacker and Atlanta Fed President Dennis Lockhart today also focused on inflation, Lacker, a hawk, saying it could "move significantly higher" when oil prices bottom out and Lockhart saying the FOMC has been encouraged by a rebound in expectations. The Fed will have some verbal gymnastics ahead if likely momentum in inflation forces to Fed to back away from last week's dovishness and restart discussion of hikes.
Markets: spread markets rebound
Risk assets today continued to get a lift from improving economic signals and continued central bank support. Credit default swaps on 5-year investment grade corporate debt have tightened 11 bp since last week's dovish Fed meeting, and CMBS and ABS have tightened in the last week, too. MBS spreads, meanwhile, have widened slightly since the Fed meeting on modest supply pressure. The low rates of February spurred slight refinancing that should flow into the market in March and April.
Economy: barriers to homeownership
A 34% rise in home prices since 2012 has led to a slew of headlines about the fading affordability of housing, but other factors may be more important in the decision to own a home. Using proprietary data on the transition from renting to owning, Fed researchers have found that "measures of housing affordability generally are not significantly predictive of the perceived barriers to homeownership among young renters." Individual circumstances such as a debt load from student loans or credit cards play a bigger role. With the homeownership rate of households headed by people 35 or younger near 35 percent – down from 43 percent a decade ago – rising student debt looks likely to slow any rebound. See Jeff Larrimore and his colleages' piece, What are the Perceived Barriers to Homeownership for Young Adults?