Updated: 07-16-2018

The U.S. Treasury yield curve saw a continuation of its flattening trend during the past week. The 2s10s spread tightened by five basis points to 29 bps while the 2s30s spread compressed by two basis points to 40 bps. Longer-dated Treasuries continued showing relative strength amid persistent focus on the expected impact of trade tensions and the divergence between hawkish monetary policy at the Fed and mostly dovish policy elsewhere.

Corporate spreads also tightened since last week. Most notably, the high yield spread tightened by nine basis points to 380 bps, dipping back beneath its high from March (388 bps). The tightening took place after the high yield spread expanded by 29 basis points two weeks ago. For its part, the investment grade spread tightened by four basis points to 115 bps, pulling back from the year-to-date high that was marked just below 120 bps.

In LIBOR, the overnight rate declined to 1.926% from 1.930% while the three-month rate decreased to 2.333% from 2.343%. The one-year rate increased to 2.776% from 2.772%. The spread between the three-month rate and the overnight rate tightened to 40.7 bps from last week's 41.3 bps.

The yield spread between Germany's 10-yr bund and the U.S. Treasury 10-yr note tightened by a basis point to -252 bps, edging up from its cycle low.

The 5y5y forward rate followed its first increase in a month by retracing the bulk of that uptick. The 5y5y forward rate declined five basis points to 2.15% after increasing by seven basis points two weeks ago. This leaves the 5y5y forward rate 19 basis points below its February high (2.34%) and seven basis points above the March low (2.08%).

The fed futures market remains almost certain that the next rate hike will be announced at the September FOMC meeting. Looking ahead, the implied probability of another hike in December has increased to 55.6% from last week's 49.5%. The Minutes from the June FOMC meeting were released last week, showing that policymakers are comfortable staying on the tightening path.

7/9/2018 7/2/2018 Change
Fed Fund Futures Rate Prediction Sept. 2018 (86.8%) Sept. 2018 (75.0%)  NA
10yr Treasury - 2yr Treasury 29 bps 34 bps   -5 bps
High Yield - 10yr Treasury 380 bps 389 bps   -9 bps
Corp A - 10 yr Treasury 115 bps 119 bps   -4 bps
10 yr Bund - 10 yr Treasury -252 bps -253 bps   1 bp
5yr, 5yr Forward Inflation Breakeven 2.15% 2.20%   -5 bps

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