There was optimism toward the U.S. economic recovery last week. Daily COVID-19 case counts fell further from their January peak, and vaccinations continued across the country. A diminishing pandemic will help world economies. But the pandemic is not the only thing driving rates. Economic data last week beat expectations. And in Washington DC, President Joe Biden's $1.9 trillion stimulus proposal moved forward, which would accelerate the rebound even more.

All of these developments led to a sudden shock in the Treasury and mortgage-backed security markets. Orion’s brokers know that good news for the economy tends to push rates higher. The benchmark U.S. 10-year yield hit 1.61 percent on Thursday, its highest level in a year, although it dropped right back down Friday.

Orion’s brokers should know that a new stimulus is expected to lead to faster economic growth and inflation. The Federal Reserve can’t predict what happens politically in Washington. The stimulus is forecast to push inflation higher, probably faster and farther, than our Federal Reserve’s economists expected. Even Fed Chair Powell agreed with the market in expecting a "robust and ultimately complete recovery” but stated that the Fed won't cut down on asset purchases or consider rate hikes until it sees "substantial further progress" toward its inflation and employment targets.

Fed Chair Jerome Powell testified in front of the Senate Banking Committee last week and despite his assessment that the economy is a “long way from our employment and inflation goals” interest rates continued to climb throughout the week. With more fiscal stimulus on the way, the financial markets are bracing for significant increases in consumer spending that would lead to a spike in inflation.

Many believe that last week’s price moves were less inspired by rate-hike expectations and simply a case of "buying the fundamental dip" before strong economic growth. Although it won’t help the pool of available borrowers for Orion’s brokers to refinance, there's room for yields to climb higher still. Real yields, which are nominal yields adjusted for inflation, remain negative, signaling there's still enough weakness in the economy to warrant parking cash in the safe haven.

While consumer inflation has remained below the Fed’s 2 percent goal for some time, housing prices heated up measurably. The S&P CoreLogic National Home Price Index showed a 10.4 percent annual increase for December, the quickest appreciation since 2014. Manufacturing data continues to point to strength as durable goods orders increased 3.4 percent in January. Jobless claims fell to730,000 for the week ending February 20 although it remains to be seen whether the severe weather over the prior week had an effect on the data. Initial claims remain well above the height of the 2008-2009 recession underscoring just how far the economy is from a full recovery.

The Federal Reserve’s Open Market Committee will likely move first in this case to avoid additional Treasury-market drama, but the Fed won't have the luxury of waiting for the next meeting and will have to respond to the abrupt market moves in speeches this week.

Despite what moves the Fed makes, Orion’s brokers know that we are keeping an eye on the markets, will honor rate locks as always, will continue to focus on our brokers’ business.

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