Market Insights – May 7, 2018

Unemployment Hits 17-Year Low

View this week's rates.

Prior Week Summary

Interest rates were remarkably stable for a week with so many potential catalysts for yield volatility. The long-term flattening trend remains intact, as the yield spread between 2-year and 10-year Treasury Notes fell an additional 2.5 basis points this week to a spread of 0.45%. The nearly 13-year low prompted many articles on the link between the curve and future economic prospects.

The past has shown us that the curve can stay flat for long timeframes, while the economy enjoys positive growth trends. The analysis, typically referenced with respect to historical yield curves and their ability to predict recessions, most often refers to an actual inversion in the spot curve, which has not happened to this point. It is also worthwhile to point out that many economists argue that the information content embedded in the slope of the yield curve is likely to be lower in the current environment than it has been in the past due to the meaningful impact that global central banks have had on asset markets in the wake of the financial crisis. After all, Bloomberg data suggests there is still roughly $8 trillion in global bond market value trading with negative yields.

In economic news, the Fed left rates unchanged while highlighting the committee’s symmetric 2% inflation target in the context of recent increases in core PCE. The market is almost entirely convinced that the Fed will hike an additional 25 basis points next month, with a market implied probability currently greater than 90%.

Separately, The Labor Department reported that the unemployment rate dropped to 3.9%, a 17-year low. The report detailed that the economy added 164,000 jobs in April following a 135,000 increase in March. Despite the tightness in labor markets that a sub 4% unemployment rate suggests, wage inflation remains relatively muted, with average hourly earnings only rising 0.1% in April on an unchanged 34.5-hour work week.

Lastly, the Treasury Department guided the market to expect increases in bond auction sizes again this quarter to accommodate our growing deficits. The report also announced the introduction of a new 2-month Treasury bill.

The Look Forward

The big event on the horizon this week is the highly anticipated launch of exchanged traded SOFR futures. We will be monitoring developments in this market very closely, and will keep our clients up-to-date as the situation unfolds.

 

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.

 

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.

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Market Insights – May 14, 2018
Market Insights – May 14, 2018

The economic news of the week was all about the inflation landscape, with updates to both consumer and prod...

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Market Insights – April 30, 2018
Market Insights – April 30, 2018

Fixed income markets spent a good portion of last week pondering the implications of a 3% 10-year Treasury ...

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