Jul 25 2016 - Rate Brief
The stock market locked in its fourth consecutive weekly advance with the S&P 500 rising 0.6% for the week. The index climbed as investors responded to a slew of earnings, showing little concern over the upcoming July policy meeting at the Federal Reserve.
Elsewhere, the Dollar Index registered its third consecutive weekly gain while Treasuries maintained narrow ranges, leading to slight changes in interest rate spreads.
The past week was quiet, but this was not in anticipation of an impending rate hike storm. The implied probability of a rate hike at this week's meeting sits at just 2.4% and the fed funds futures market continues pointing to March 2017 as the most likely month when the next hike will be announced.
|Fed Fund Futures Rate Prediction||Mar. 2017 (53.9%)||Mar. 2017 (51.2%)||---|
|10yr Treasury - 2yr Treasury||86 bps||89 bps||-3 bps|
|High Yield - 10yr Treasury||539 bps||540 bps||-1 bp|
|Corp A - 10 yr Treasury||122 bps||123 bps||-1 bp|
|10 yr Bund - 10 yr Treasury||-165 bps||-171 bps||6 bps|
|5yr, 5yr Forward Inflation Breakeven||1.66%||1.54%||12 bps|
The spread between the 10-yr Treasury note and the 2-yr Treasury note slipped three basis points to 89 after a 13-basis point increase last week. The turn from last week's spike has marked a lower high in the spread, which has been marching lower for more than a year. One year ago, this spread was at 158.
High-yield spreads also ticked down as the high-yield-10yr spread slipped one basis point to 539. This followed a 48-basis point dive last week. The spread sits on this year's low, which coincides with levels from late 2015, but is up from 479 one year ago.
Investment grade spreads decreased for the fourth consecutive week, but the most recent downtick was limited to just one basis point. The spread slipped to 122, remaining just above last year's level of 120.
The spread between the German Bund and the 10-yr Note increased six basis points to -165. This move retraced nearly half of last week's drop, leaving the spread in the bottom half of this year's range and below last year's -156.
Inflation expectations, as measured by the five-year, five-year forward breakeven rate, saw their second consecutive increase after marking a new low for the year. The 5y5y forward rate followed a seven-basis point spike with a 12-basis point jump to 1.66%. The rate is down from last year's level of 2.11%, but has rallied 26 basis points over the past five weeks.