Updated: 03-26-2015

The March directive from the Federal Open Market Committee (FOMC) was much more dovish than expected. The FOMC tacitly acknowledged that there were biases in the unemployment rate. Millions of discouraged workers remain unaccounted for in the official unemployment rate. That means the official rate appears to be much better than actual labor market conditions.

Yields on the 10-year Treasury fell 20 basis points (bps) over the week and settled at 1.93% on Friday, March 20. That was the lowest yield since February 5. 

3/20/2015 3/13/2015 Change
Fed Fund Futures Rate Prediction Oct. 2015 (66.7%) Sep. 2015 (57.7%) ---
10yr Treasury - 2yr Treasury 133 bps 145 bps -12 bps
High Yield - 10yr Treasury 468 bps 450 bps 18 bps
Corp A - 10 yr Treasury 109 bps 104 bps 5 bps
10 yr Bund - 10 yr Treasury -173 bps -188 bps 15 bps
5yr, 5yr Forward Inflation Breakeven 2.02% 1.97% 4 bps

The FOMC reiterated that labor market conditions, while improved, are not up to par with the Fed's mandate. Furthermore, disinflationary trends are keeping inflation levels from meeting the FOMC target. Given these factors, the fed funds futures market pushed back its expectation for the first rate hike to the October meeting.

The 10-year Treasury bond yield declined 20 bps to 1.93% and the 2-year yield ended the week down 8 bps.

Investment grade corporate bonds had little reaction to the FOMC statement and yields generally moved in tandem with long-term treasuries. The default risk in the high-yield space continued to expand on lower oil prices and lackluster earnings.

Concerns about Greece helped drive a flight to quality in European bond markets, which drove the 10-year bund yield down 5 bps to 0.2%. The 10-year Treasury yield, however, declined by a greater magnitude. As a result, the spread between the 10-year bund and 10-yr note narrowed by 15 bps to -173 bps.

The five-year, five-year forward inflation breakeven increased to a little over 2.0%, which is still half of a percentage point below the Fed's implied CPI target of 2.5%.

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