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Rate Brief

Updated: 2016-06-24, 16:00:16 ET

The Interest Rate Outlook

The stock market stumbled last week, sending the the S&P 500 lower by 1.2%. Global growth concerns and 'Brexit' fears were roundly cited for the cautious action in equities and interest rate spreads saw some movement after two range-bound weeks. 

The Federal Open Market Committee met last week, but did not introduce any changes to its policy stance. The announcement was not a surprise and the Fed pointed to 'Brexit' worries as one of the reasons for not rocking the monetary policy boat. While the announcement did not surprise investors, Friday's comments from St. Louis Fed President and FOMC voter James Bullard were unexpected. Specifically, Mr. Bullard said that he believes only one rate hike will be warranted through 2018. 

Once again, rate hike expectations were pushed out, with the fed funds futures market not giving any serious thought to the idea of a rate hike before the end of the year. Furthermore, the market estimates just a 27.0% likelihood of a rate hike in February of 2017. 

Fed Fund Futures Rate PredictionAfter Feb. 2017 (27.4%)Dec. 2016 (58.8%)---
10yr Treasury - 2yr Treasury92 bps91 bps1 bp
High Yield - 10yr Treasury604 bps586 bps18 bps
Corp A - 10 yr Treasury135 bps130 bps5 bps
10 yr Bund - 10 yr Treasury-165 bps-162 bps-3 bps
5yr, 5yr Forward Inflation Breakeven1.41%1.55%-14 bps

The spread between the 10-yr Treasury note and the 2-yr Treasury note ticked up one basis point after seeing a two-basis point downtick a week before. The spread remains near levels from late 2007 after marking a fresh year-to-date low at 87 basis points on Thursday. The continued weakness suggests that growth concerns remain palpable as the spread hovers well below last year's level of 165.

High-yield spreads increased as the high-yield-10yr spread rose 18 basis points to 604. This move followed a seven-basis point drop last week and it lifted the spread to a one-month high after marking a fresh year-to-date low four weeks ago. The spread remains above last year's level of 440.

Investment grade spreads also ticked up, rising five basis points to 135. This move leaves the spread at levels from early April, and above last year's 114.


The spread between the German Bund and the 10-yr Note slipped three basis point to -165 after a one-basis point downtick last week. This spread was at -146 basis points last year.

Inflation expectations saw their third consecutive weekly decline, cratering to a new low for the year. The five-year, five-year forward breakeven rate decreased 14 basis points to 1.41% after falling four basis points last week. This rate has seen a swift reversal after marking a 2016 high at 1.83% in late April. One year ago, the 5y5y forward was at 2.10%.