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Rate Brief

Updated: 2015-03-04, 16:00:20 ET

The Interest Rate Outlook

There was some intraweek volatility as the bond market digested Fed Chair Yellen's economic and rate views from her Congressional testimony. In the end, Treasury yields at the front end of the curve only moved a few basis points from the previous week's close as rate hike expectations were little changed.

Flight to quality helped push down German 10-year bund yields.

Fed Fund Futures Rate PredictionSep. 2015 (54.6%)Sep. 2015 (57.6%)---
10yr Treasury - 2yr Treasury137 bps146 bps10 bps
High Yield - 10yr Treasury435 bps437 bps-20 bps
Corp A - 10 yr Treasury103 bps104 bps-5 bps
10 yr Bund - 10 yr Treasury-168 bps-174 bps6 bps
5yr, 5yr Forward Inflation Breakeven2.09%2.13%-4 bps

The 10-2-yr spread came in nearly 10 bps as 10-year Treasury yields declined by 13 bps to 2.00% and 2-year Treasury yields fell by 4 bps.  Expectations still call for the first rate hike to occur at the September 2015 FOMC meeting.

Corporate bond spreads were virtually unchanged over the last week.

Treasury yields in the U.S. fell at a slightly faster rate than German bund yields over the last week.

Headline CPI prices turned negative on a year-over-year basis in January. Excluding food and energy, core CPI increased 1.6% y/y in January, which is roughly 100 bps less than the Fed's implied target rate. The market responded to the poor inflation reading by reducing the 5-year, 5-year forward inflation breakeven by 4 bps to 2.09%. The Fed's implied CPI target is roughly 2.5%, which means the market still believes that inflation growth will undershoot the Fed's goal.