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Rate Brief

Updated: 2017-10-30, 16:00:24 ET

The Interest Rate Outlook

U.S. Treasuries spent the past week in a steady retreat, which resulted in longer-dated issues erasing the bulk of their gains from two weeks ago while shorter maturities slid to fresh swing lows.

The yield curve steepened a bit with the 2s10s spread expanding by 4 bps to 80 bps, but this move developed after the yield curve briefly compressed to its flattest level in ten years. With the 2s10s spread bouncing up to downward sloping resistance, the onus will now be on the market to prove that this year's flattening trend is running on borrowed time.

The yield curve's steepening was accompanied by compression in corporate and high-yield spreads as continued demand for corporate debt pressured the investment grade spread to its flattest level in more than three years while the high-yield spread is on the verge of doing the same. 

Expectations for a December rate hike solidified to the point where the market is essentially certain that the fed funds target range will be increased to 1.25%-1.50% in seven weeks.

Fed Fund Futures Rate PredictionDecember 2017 (98.2%)December 2017 (87.8%) NA
10yr Treasury - 2yr Treasury80 bps76 bps 4 bps
High Yield - 10yr Treasury352 bps368 bps-15 bps
Corp A - 10 yr Treasury82 bps87 bps-4 bps
10 yr Bund - 10 yr Treasury-193 bps-190 bps-3 bps
5yr, 5yr Forward Inflation Breakeven2.02%2.01% 1 bps