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 Prediction||Sep. 2015 (54.6%)||Sep. 2015 (57.6%)||---|
|10yr Treasury - 2yr Treasury||137 bps||146 bps||10 bps|
|High Yield - 10yr Treasury||435 bps||437 bps||-20 bps|
|Corp A - 10 yr Treasury||103 bps||104 bps||-5 bps|
|10 yr Bund - 10 yr Treasury||-168 bps||-174 bps||6 bps|
|5yr, 5yr Forward Inflation Breakeven||2.09%||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.