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Rate Brief

Updated: 2016-09-28, 16:00:25 ET

The Interest Rate Outlook

The stock market enjoyed its second consecutive weekly advance that sent the S&P 500 (+1.4%) back into the neighborhood of its all-time high.

The past week was highlighted by policy statements from the Bank of Japan and the Federal Reserve. The Bank of Japan was up first, announcing plans to leave its key interest rate unchanged (-0.1%). However, the central bank did announce plans to buy more ETFs and said it will try to control the yield curve through quantitative and qualitative easing flows. For its part, the Federal Reserve also held pat, but three policymakers voted in favor of a rate hike.

Federal Reserve Chair Janet Yellen discussed the policy decision, saying the rate hike reservation at the September meeting was tied to concern that labor market slack is being taken up at a slower pace than previous years and that inflation continues to run below the 2 percent objective. It was acknowledged that a rate hike could take place in December, but the implied likelihood of a December hike decreased to 54.2% from 55.0%, as indicated by the fed funds futures market.

Fed Fund Futures Rate PredictionDec. 2016 (54.2%)Dec. 2016 (55.0%)---
10yr Treasury - 2yr Treasury85 bps93 bps-8 bps
High Yield - 10yr Treasury509 bps519 bps-10 bps
Corp A - 10 yr Treasury116 bps119 bps -3 bps
10 yr Bund - 10 yr Treasury-176 bps-176 bpsUNCH
5yr, 5yr Forward Inflation Breakeven1.72%1.68%4 bps

The spread between the 10-yr Treasury note and the 2-yr Treasury note registered its first decline in four weeks, falling eight basis points to 85. This move put the spread back in a 76-91 range, which has held for ten out of the last eleven weeks. The spread is back near levels from early August and well below last year's level of 146.

High-yield spreads declined ten basis points to 509, approaching this year's low. The spread remains below last year's level of 555, which corresponded with the early stages of a sharp decline in the price of crude oil.

Investment grade spreads ticked down three basis points to 116 after seeing a one-basis point increase two weeks ago. One year ago, this spread was at 131.


The spread between the German Bund and the 10-yr Note held unchanged at -176 for the second week in a row. The spread remains inside a narrow range, sitting well below last year's level of -156.

Inflation expectations, as measured by the five-year, five-year forward breakeven rate, increased modestly. The 5y5y forward rate increased four basis points to 1.72% after holding steady a week before. The rate remains below last year's level of 1.87%, hovering 32 basis points above this year's low.