Updated: 07-22-2016

The stock market enjoyed its third consecutive weekly advance, sending the S&P 500 to a new all-time high. The benchmark index climbed 1.5%, likely luring some money out of the bond market as the 10-yr yield jumped 20 basis points to 1.56%.

Stimulus hopes ran high throughout the week, but the Bank of England made no changes to its policy after holding a meeting on Thursday. However, the central bank's statement kept hopes alive for easing measures being unveiled after the next meeting. Separately, the Bank of Japan is scheduled to meet on July 28.

The charge to new highs in the equity market pulled forward rate hike expectations with the fed funds futures market pricing in a 51.2% likelihood of  a rate hike in March 2017 after showing little concern for a hike in 2017 just last week. The implied probability of a rate hike in June 2017 has jumped to 63.3% from 13.4% in one week.

07/15/2016 07/08/2016 Change
Fed Fund Futures Rate Prediction Mar. 2017 (51.2%) After Jun. 2017 (13.4%) ---
10yr Treasury - 2yr Treasury 89 bps 76 bps 13 bps
High Yield - 10yr Treasury 540 bps 588 bps -48 bps
Corp A - 10 yr Treasury 123 bps 131 bps -8 bps
10 yr Bund - 10 yr Treasury -171 bps -157 bps -14 bps
5yr, 5yr Forward Inflation Breakeven 1.54% 1.47% 7 bps

The spread between the 10-yr Treasury note and the 2-yr Treasury rose 13 basis points to 89, erasing the entire 11-basis point slide from last week. The spread bounced back after falling to levels from late 2007 in a move that was predicated on yield chasing. With global bond yields remaining under pressure, this spread is well below last year's level of 172.

High-yield spreads headed the other way as the high-yield-10yr spread plunged 48 basis points to 540 after seeing a 13-basis point decrease a week ago. The spread marked a seven-month low at 567 in late June, and last week's move sent the spread to its lowest level since last September. 

Investment grade spreads decreased for the third consecutive week, falling eight basis points to 123 basis points. The spread remains above last year's level of 118.


The spread between the German Bund and the 10-yr Note fell 14 basis points to -171 after seeing a six-basis point increase a week ago. The spread is back near this year's low, hovering beneath last year's level of -149.

Inflation expectations, as measured by the five-year, five-year forward breakeven rate, saw their second consecutive increase after marking a new low for the year. The 5y5y forward rate rose seven basis points to 1.54%, but remains well below last year's rate of 2.11%.

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