Good Morning on this terrific and best day of the week, Wednesday,

Bonds are still weak.

Both the ten-year note and Mortgage-backed securities failed to hold the levels necessary to sustain the rally. The ten-year note now sits at just under 3.56 and I see risk up to 3.65, which is the next Fibonacci level and one that I think will hold until Friday. Mortgage Bonds are hanging onto its last line of defense. While anything is possible given all the external factors spinning around us, I do not expect much to happen until Friday which is when we will see the PCE numbers. These inflation numbers are more important than CPI and can move the markets in either direction. If you float right now, prepare for pain if the Mortgage bonds fall below its current level and the ten-year rises above 3.65.

I put a lot of faith in the consumer to know what the economy is doing in real time vs the analysts who look in the rear-view mirror. To wit, U.S. consumers were a little less worried about inflation in February than in January. Expectations for price increases over the coming year fell to 4.2% from 5% a month earlier, according to the Federal Reserve Bank of New York’s Survey of Consumer Expectations. Three-year-ahead expectations held steady at 2.7%. Fed officials want to keep inflation expectations anchored close to their 2% goal–some worry that high and rising forecasts could become a self-fulfilling prophecy.

And not to get too deep into what could be the next shoe to drop in banking but exposure to Commercial real estate is a brewing problem. I hate to say it but any distress is normally good for bonds and interest rates.  “In the White House, Treasury Department and Federal Reserve, policymakers are examining the potential risks posed by the approximately $20 trillion market for commercial real estate, which some analysts project is heading for a crash over the next two years, according to four people familiar with the matter, who spoke on the condition of anonymity to reflect private conversations.”

So far, developers and the banks that lend to them haven’t been badly affected.

Because commercial real estate leases tend to span several years, unlike the one-year terms for most residential units. But millions of these leases are going to expire over the next two years, potentially setting off a domino effect that could rattle the U.S. financial system. The nightmare scenario would come if companies decided not to renew their leases or insist on much more favorable terms, driving the value of commercial real estate down across the board. That would mean the loans many banks have made against office buildings are suddenly worth less than they are now, especially with interest rates much higher today than a year ago. And that, in turn, could make depositors and investors doubt banks’ financial stability — potentially leading to the same kind of runs that brought down SVB and Signature this month.

The banks at risk are not the Wall Street giants that defined the 2008 financial crisis, but the smaller regional institutions that have already suffered from wild swings this month. Before it collapsed and had to be taken over by the federal government earlier this month, Signature Bank had the 10th-largest portfolio of commercial real estate loans. First Republic Bank, which Wall Street banks are trying to save from a potential collapse, has the ninth largest. At least 400 U.S. banks with at least $100 billion in total assets at the end of last year have three times as many loans for commercial real estate as they do safer investments. KBW, a financial services firm, released a March 7 report that forecasts a more than 30 percent decline in the value of office property over the next two years.

Please remain safe and stay healthy, make today great!