Flattening Trend Continues
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.
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
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