The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation increased 0.3% in February, while the year-over-year reading fell from 5.3% to 5%. Both readings were just below market estimates. Core PCE, which strips out volatile food and energy prices, also rose by 0.3% with the year-over-year change declining from 4.7% to 4.6%.

What’s the bottom line? Inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond's fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise like we saw throughout much of last year.

Inflation continues to trend lower in the right direction, though last month’s reading would have been even lower if the decelerating shelter costs seen in the real world were better reflected in the PCE report. Once this lagging shelter data catches up in the PCE report, it should cause additional downside pressure to inflation.