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Rate Brief

Updated: 2015-03-30, 16:00:20 ET

The Interest Rate Outlook

A bit of disappointing economic data last week had little impact on Treasury yields and spreads.

Overseas, heightened concerns about a potential Greek default failed to draw much action in long-term German Bund yields.

Fed Fund Futures Rate PredictionOct. 2015 (57.1%)Oct. 2015 (66.7%)---
10yr Treasury - 2yr Treasury137 bps133 bps4 bps
High Yield - 10yr Treasury463 bps468 bps-5 bps
Corp A - 10 yr Treasury109 bps109 bps0 bps
10 yr Bund - 10 yr Treasury-171 bps-173 bps2 bps
5yr, 5yr Forward Inflation Breakeven1.98%2.02%-4 bps

The probability that the first rate hike will occur in October dropped to 57% from 68%. Weaker-than-expected durable goods demand along with benign inflation growth should keep the FOMC from moving hastily.

That led to a slight steepening of the 10-year, 2-year yield curve. Yields on the 10-year Treasury rose 3 bps to 1.95%, while yields on the 2-year Treasury declined 2 bps to 0.58%.

Investment grade corporates continued to move in tandem with 10-year Treasury yields. The default risk on high-yield bonds came in slightly as oil prices inched higher.

German 10-year bund yields rose 4 bps over the week to 0.24%. The spread to Treasuries was virtually unchanged.

Consumer prices in February increased for the first time on a month-to-month basis since October 2014. Surprisingly, inflation expectations declined on the news, and the five-year, five-year forward breakeven rate closed below 2% for the week. The Fed's implied CPI target is roughly 50 bps higher at 2.5%.