Market Insights – February 5, 2018

February 5, 2018 Chatham Financial

The Return of Market Volatility?

View this week's rates.

Prior Week Summary

Last week the market reminded investors that sentiment and momentum are powerful forces that can change on a dime. Both equity and fixed income markets saw sharp price declines on the back of positive economic data, as well as the increased perception among market strategists that longer term projections for interest rates may need to be recalibrated. Alan Greenspan, who famously coined the term “irrational exuberance”, claimed last week that the “bond market bubble will eventually be a critical issue” and added “we’re working toward a major increase in long-term interest rates”. The former Fed Chairman has a mixed track record of calling asset bubbles, but his perspective merits some consideration.

The concern over rising budget deficits and increasing inflation has pushed the 10-year Treasury note yield toward 2.85%, a 45 basis point increase from the start of the year. The January employment report handily beat consensus expectations, detailing that the economy added 200,000 jobs in the first month of the year, with the unemployment rate staying steady at 4.1%. Average hourly earnings increased 0.3% in January, adding 2.9% on a year-over-year basis.

As of this publication, the market has now begun to price-in nearly 3 additional Fed hikes over the course of the year, with expectations for moves in March, June and December.

The Look Forward

There is a relatively light data calendar for this week, beginning with updated data expected on the state of the manufacturing economy as well as the trade balance. There is a full plate of Fed speakers on deck this week as well as a full government auction calendar for the market to digest.

 

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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Market Insights – February 12, 2018
Market Insights – February 12, 2018

Equity markets were incredibly volatile last week, with stock prices swinging wildly in sometimes frantic t...

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Market Insights – January 29, 2018
Market Insights – January 29, 2018

The sell-off in rates continues to gain momentum on the back of mostly positive economic data.

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