Market Insights – October 22, 2018

October 22, 2018 Chatham Financial

Modestly Restrictive

View this week's rates.

Prior Week Summary

Rates continued their flattening trend last week, led by weakness on the front-end of the curve as the Fed minutes were interpreted by the market to be somewhat hawkish. The spread between 2-year and 10-year Treasury notes compressed another two basis points to a three-week low of 28 bps. The Fed meeting minutes set the path for continued hiking of the policy rate, given the Committee’s view of the risk of potential asset bubbles. Specifically, the minutes revealed that “A few participants expected that policy would need to become modestly restrictive for a time… and it would be necessary to temporarily raise the federal funds rate above the assessment of its longer-run level in order to reduce the risk of a sustained overshooting of the 2% inflation objective or the risk posed by significant financial imbalances.”

As it relates to asset bubbles, the minutes suggested that “some participants commented about the continued growth in leveraged loans, the loosening of terms and standards on these loans, or the growth of this activity in the nonbank sector as reasons to remain mindful of vulnerabilities and possible risks to financial stability.”

In other economic news, industrial production was reported to have risen 0.3% in September with notable strength in mining and orders for durable goods. Also, retail sales came in slightly below consensus expectations, gaining 0.1% in September due to a slower pace of sales at gas stations and restaurants.

The Look Forward

The data calendar is full this week features updates on the manufacturing sector, housing prices, as well as personal income and spending.

 

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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