Updated: 12-15-2017

The past week did not see too much activity in the Treasury market as most spreads remained little changed. The spread between the 10-yr note and the 2-yr note held at 57 bps, but dipped as low as 53 bps during the week. 

With the yield curve flattening trend showing no signs of stopping, more and more analysts have commented on the trend, but many have justified the flattening as a byproduct of low yields around the globe. However, this doesn't change the fact that a flat--or inverted--yield curve would reduce the profitability of banks, putting pressure on the overall economy. Furthermore, the yield curve has a history of being a reliable signal when it comes to expectations for future economic growth. The last seven inversions were all followed by recessions. On a related note, the Economist Intelligence Unit believes that a recession is likely to take place in the United States in 2019.

The Senate tax bill continued moving towards becoming law, but differences between the Senate and House versions are still being reconciled. It is worth noting that Finance Ministers from the UK, Germany, France, Italy, and Spain sent a joint letter to U.S. Treasury Secretary Steven Mnuchin, protesting the tax bill. The Finance ministers expressed concern that the new tax policy would contravene double taxation treaties and have a major distortive impact on international trade.

The yield spread between Germany's 10-yr bund and the U.S. Treasury 10-yr note contracted six basis points to -206 on top of last week's seven-basis point contraction.

Inflation expectations expressed by the 5y5y forward rate saw a slight uptick, edging up two basis points to 1.99%, but remained below the 2.00% level.

The fed funds futures market remains certain that the FOMC will call for a 25-bps rate hike tomorrow. Looking past December, the fed funds futures market shows a 62.5% implied likelihood of another rate hike in March.

12/11/2017 12/4/2017 Change
Fed Fund Futures Rate Prediction Dec 2017 (100.0%) Dec 2017 (100.0%)  NA
10yr Treasury - 2yr Treasury 57 bps 57 bps   UNCH
High Yield - 10yr Treasury 379 bps 378 bps   1 bp
Corp A - 10 yr Treasury 86 bps 88 bps   -2 bps
10 yr Bund - 10 yr Treasury -206 bps -200 bps   -6 bps
5yr, 5yr Forward Inflation Breakeven 1.99% 1.97%    2 bps


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