Flat Yield Curve Gets Flatter
Prior Week Summary
The relentless flattening of the yield curve continued last week unabated, as the spread between the 2-year and 10-year Treasury notes fell below 25 basis points to end the week. As many in the financial press have noted, it isn’t hard to find examples of inversions priced into forward markets or to find forecasting firms predicting a potential recession in 2020. The fed funds swap market seemed to be the first to feature an inverted forward curve, but now that dynamic is also evident in exchange-traded EuroDollar futures. Specifically, the LIBOR settings implied by the futures contracts suggests a decline in the short-term interest rate in the mid-2020 time-frame. The speed of the flattening has been remarkable, falling 70 basis points on a year-over-year basis with 20 basis points of that tightening coming in the last 5 weeks.
Fed Chairman Powell signaled last week that the Fed expects to keep raising rates at a gradual pace, saying that “We’re returning rates to a more normal level. If we leave rates too low for too long, then we can have too high inflation or we can have asset bubbles or housing bubbles…if we move too quickly, then we can unintentionally put the economy into a recession.”
Last week also featured a newsworthy update on the market’s eventual transition away from LIBOR. CFTC Chairman Christopher Giancarlo stated publically that “The discontinuation of LIBOR is not a possibility. It is a certainty. We must anticipate it, we must accommodate it and we must adapt to it.” On a related note, market infrastructure related to SOFR continues to march forward, with OIS SOFR products now eligible for clearing on a major CCP.
The Look Forward
The market has a relatively active data calendar for economic updates this week as well as any news from the Fed Chairman’s semi-annual update to Congress.
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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