Market Insights – August 27, 2018

August 27, 2018 Chatham Financial

Flattening Trend Continues

View this week's rates.

Prior Week Summary

Markets seem to have taken an early start to the Labor Day holiday as activity has been relatively muted as the summer draws to an end. The flattening trend in the Treasury market appears to be gaining momentum, as the spread between 10-year Notes and 2-year Notes fell below 19 basis points on Friday, a nearly five basis point tightening over the course of the week. The minutes of the most recent Fed meeting addressed this reality in a way that only an economist is likely to appreciate. The minutes suggested “Participants also discussed the possible implications of a flattening in the term structure of interest rates. Several participants cited statistical evidence for the United States that inversions of the yield curve have often preceded recessions…and suggested that policy-makers should pay close attention to the slope of the yield curve in assessing the economic and policy outlook. Other participants emphasized that inferring economic causality from statistical correlations was not appropriate.”

The minutes also suggested that the Fed is considering changing the phrase that the “stance of monetary policy remains accommodative” in future statements to reflect their view that the policy rate may be approaching its terminal level.

The Look Forward

The data calendar this week is active, with updates expected on the state of the manufacturing sector, 2nd quarter GDP, the inflation landscape, as well as consumer sentiment. Many market participants may also pause to mourn the passing of a true American hero, Senator John McCain, who is scheduled to lay in state at the U.S. Capitol on Friday.

 

Rates Snapshot

Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.

 

Market Implied Policy Path (Overnight Indexed Swap Rates)

Source: Chatham Financial

 

Fixed Income Snapshot

Source: Bloomberg Finance L.P.

 

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Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions.

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