Jun 29 2015 - Rate Brief
The daily struggle between Greece and its creditors looked like it was going to come to a mutually beneficial end at the market's close on Friday. With tempered views on a Greek default, yields on U.S. Treasuries and German bunds rose substantially throughout the week.
Keep in mind that this report evaluates rate trends as of June 26. Rate conditions abruptly and unexpectedly changed over the weekend. Greece Prime Minister Tsipras announced that he was going to put the terms of the bailout requested by the Troika to a public referendum. In the meantime, Greece closed its banks and implemented strict capital controls.
In response, German and French leaders announced that they would not alter their bailout proposal, and the likelihood of a default on the 1.7 bln euro loan to the IMF due Tuesday increased significantly.
A rush to safety amid the chaos this morning has driven yields back down to where they were on June 19, making the movement in yields last week nearly irrelevant.
|Fed Fund Futures Rate Prediction
||Dec. 2015 (57.0%)
||Dec. 2015 (50.0%)
|10yr Treasury - 2yr Treasury
|| 16 bps
|High Yield - 10yr Treasury
|Corp A - 10 yr Treasury
|10 yr Bund - 10 yr Treasury
|5yr, 5yr Forward Inflation Breakeven
The latest U.S. economic data continued to show an active acceleration in growth.
Demand for homes in May easily topped expectations. Sales of existing homes reached their highest point since 2009 and new home sales hit their highest level since 2008.
Meanwhile, personal spending growth reached a 6-year high in May, and demand was strong across all consumer sectors.
As a result of the stronger economic situation, yields on the 10-year Treasury rose 23 basis points (bps) to 2.49%. Besides briefly touching 2.50% on June 10, 10-year yields haven't been this high since September 2014.
The movement in the 2-year Treasury note was much more subdued. Yields rose 7 bps to 0.72%, which is where these bonds were trading at the middle of the month.
The 2-year, 10-year spread rose 16 bps to 177 bps. That was the steepest the yield curve has been between these two maturities since November 2014.
Yields on investment-grade corporate debt moved relatively in-line with 10-year Treasuries. The risk premium was relatively unchanged.
The same wasn't true with high-yield debt. Yields on high-yield debt rose 5 bps compared to the 23 bps move in the 10-year Treasury. The spread-to-Treasuries fell 18 bps to 423 bps, which was the smallest risk premium in two weeks.
With a Greek default becoming less likely, as of Friday, the sell-off in German bunds drove the 10-year yield up 9 bps to 0.91%.
Following a 5 bps increase during the week ending June 12, the five-year, five-year forward inflation breakeven rose an additional 9 bps last week. While the cumulative 14 bps increase was large, the breakeven has remained range-bound between 2.00% - 2.20% since the beginning of the year.