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Rate Brief

Updated: 2017-09-18, 16:00:21 ET

The Interest Rate Outlook

At first glance, the past week saw minimal movement in Treasury yields and yield spreads, but that was largely owed to yesterday's slide in the Treasury market, which erased gains from last week.

The Treasury complex pushed to fresh 2017 highs through the first three sessions of the abbreviated trading week. The strong demand was driven by elevated geopolitical fears and concerns about the path of Hurricane Irma, which was due to make landfall in Florida over the weekend. In addition, the steady push put pressure on short positions that were established in the wake of the election, leading to forced buying.

After setting new highs ahead of the weekend, Treasuries sold off on Monday amid an improvement in risk tolerance. North Korea did not conduct a missile test on Saturday and the path of Hurricane Irma avoided worst-case projections, making for a better than feared weekend.

Rate hike expectations were little changed after being pulled forward two weeks ago. The fed funds futures market does not expect another hike this year, projecting the next rate increase for June 2018.

Fed Fund Futures Rate PredictionJune 2018 (59.9%)June 2018 (51.4%) NA
10yr Treasury - 2yr Treasury82 bps81 bps1 bp
High Yield - 10yr Treasury394 bps393 bps1 bp
Corp A - 10 yr Treasury98 bps97 bps1 bp
10 yr Bund - 10 yr Treasury-181 bps-181 bps unch
5yr, 5yr Forward Inflation Breakeven2.02%1.94%  8 bps

The yield spread between the 10-yr Treasury note and the 2-yr Treasury note increased by one basis points to 82 bps. This leaves the spread five basis points above this year's low.

The yield premium on high-yield debt also ticked up one basis point, rising to 394 bps. This leaves the high-yield spread just below this year's high of 403.3 bps.

Investment-grade spreads ticked up one basis point to 98 bps over Treasuries with comparable maturities.

The spread between the 10-yr German bund yield and the 10-yr Treasury yield remained unchanged at 181 basis points as the benchmark rates for both sovereign instruments decreased by three basis points for the week to 0.34% and 2.13%, respectively.

Market expectations for five-year, five-year forward inflation increased eight basis points to 2.02%, which puts the 5y5y rate just below the May high of 2.03%. It is expected that flood recovery and rebuilding efforts in Florida and Texas will be a tailwind for inflation.