Rate Hikes, Trade Wars and Early Closes
Prior Week Summary
As was widely expected, the FOMC voted to raise their target rate for federal funds by 25 basis points on Wednesday, to 1.75%. Relative to the committee’s December projections, the FOMC has incorporated an additional two hikes prior to the end of 2020, bringing the median expectation to 3.4%. Interestingly, the committee only increased their “longer-run” projection for the terminal fed funds rate by 0.1% to 2.9%. Similarly, the committee’s projections for the longer-run change in real GDP and PCE inflation were essentially unchanged from the December projections. These updated projections will now fully incorporate the expected changes to the growth path from the changes to the tax laws. It appears that the committee views any likely impacts to GDP to be relatively short lived.
The persistent increases in the LIBOR/OIS basis continued last week, rising to nearly 60 basis points by Friday. The analyst community still largely views this relatively quick increase in the basis as a function of the increasing supply of Treasury Bills and the follow-on demand imbalances in unsecured funding markets emanating from the changes in the tax laws and repatriation flows. Against this backdrop, it is also worth pointing out that while many view this increased basis to be temporary, financial conditions more broadly are tightening from the recent lows. Only time will tell how much of the recent talk, and action, relating to tariffs and potential trade conflicts will filter their way down to the real economy.
The Look Forward
The market has a short week to look forward to, with a recommended early close on Thursday and a full day close for Good 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
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit http://www.chathamfinancial.com/legal-notices/.
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.