Fed On Deck
Prior Week Summary
Rates rose over the course of last week in anticipation of a likely 25 basis point hike by the FOMC on Wednesday. The curve steepened slightly, with long-term Treasury yields rising more than increases in short-term yields. While the longer-term trend has certainly been toward a flattening of the term structure, last week’s 5 basis point steepening between 2-year and 10-year Treasury notes seems to have been a function of the recent rise in the term premium. Data from the New York Fed indicates that nearly 70% of the recent increase in the 10-year note yield has come from rising risk premiums for fixed income securities. Many analysts attribute this increase in risk compensation to a reduction in demand for duration from pension funds with long-dated liabilities.
In economic news, residential housing starts rose more than expected, rising 9.2% to a 1.28mm annualized rate in August relative to expectations for a gain of 5.7%. The more volatile multi-family housing starts jumped nearly 30%, while single-family housing increased a more modest 1.2%. Existing home sales continue to struggle, as sales were unchanged in August at a 5.34mm unit annual pace, after falling the last few months. However, prices continue to rise, as the average supply of unsold inventory remains low relative to historical averages. In August, the National Association of Realtors reported that the median sales price rose 4.6% on a year-over-year basis to $265,000.
The Look Forward
The data calendar is full this week with updates expected on GDP, durable goods orders, PCE inflation, as well as an expected 25 basis point hike in the Fed Funds rate.
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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