September 11, 2017 – The yield on the 10 year Treasury fell to a 10-month low of 2.05% this week.  Year to date, it’s down roughly 40 basis points, confounding widely held expectations that Treasury yields would climb in 2017 given strong labor market conditions, Fed tightening, and the potential for stimulative tax and fiscal policy.  Among the current concerns reflected in the falling 10-year yields are the geopolitical risks (i.e., North Korea) and the political gridlock in Washington.  Additionally, current Treasury yields are an expression of the market’s views on the risks (or lack thereof) of future inflation, the perceived likelihood of central bank actions, and the outlook for U.S. and global growth.  One could infer the week’s drop in Treasury yields primarily reflects slower moves by the Fed and other central banks to raise short-term interest rates amid stubbornly low inflation levels globally.  For Alternative Lenders, persistently low rates help drive loan growth higher as lower lending rates become attractive to borrowers.  Additionally, institutional investors are attracted to Alternative Lending loans as they seek higher risk adjusted returns not afforded in the traditional capital markets.  

Also noteworthy this week was the surprise resignation of Federal Reserve Board Vice Chairman Stanley Fischer who is stepping down well ahead of the June 2018 expiration of his term.  His imminent departure adds to uncertainty about the Fed’s future direction, as Chair Janet Yellen’s term is set to expire in February 2018, (she is not expected to be reappointed by President Trump).  As of mid-October, the Board will have four vacancies, unless someone is appointed in the coming weeks.  Shifts in the composition of Fed leadership carry potentially huge implications for bond markets, not only in the U.S., but also globally.

Finally, competition in the Alternative Lending industry continues to accelerate. American Banker reported that mobile payments firm, Square, filed for a banking charter this week, becoming the latest company to do so. Similar to SoFi attempt to attain a bank charter, this would allow them to offer deposit accounts, loans, and other banking services to their small business customers.

Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  TIAA-CREF, Orchard Platform