Updated: 05-04-2016

Interest rate spreads have spent the past few weeks inside relatively narrow ranges and that dynamic continued last week.

The past week was highlighted by policy meetings at the Federal Reserve and the Bank of Japan. The Federal Reserve was up first, holding the fed funds rate unchanged between 0.25% and 0.50%. Going into the meeting, the market believed that the statement could begin setting the stage for a rate hike in June, but the FOMC Statement was dovish and contained no hints of an impending rate hike.

The Bank of Japan followed the Fed, releasing its policy statement late Wednesday evening. The central bank made no changes to its interest rate, but did announce a JPY300 billion, 0%, lending facility for companies affected by the Kumamoto earthquake. The yen surged on the news, dropping the dollar/yen pair into the neighborhood of this year's low near 108.00.

The dovish policy statement from the Fed was released a day before the advance GDP report for the first quarter, which showed annualized growth of just 0.5%.

Rate hike expectations have not changed much in recent weeks with the market not expecting another hike until the end of the year. The fed funds futures market sees a 64.2% chance of a rate hike in December after projecting a rate hike in November last week.

04/29/2016 04/22/2016 Change
Fed Fund Futures Rate Prediction Dec. 2016 (64.2%) Nov. 2016 (51.7%) ---
10yr Treasury - 2yr Treasury 106 bps 105 bps 1 bp
High Yield - 10yr Treasury 600 bps 607 bps -6 bps
Corp A - 10 yr Treasury 120 bps 122 bps -1 bp
10 yr Bund - 10 yr Treasury -159 bps -167 bps 8 bps
5yr, 5yr Forward Inflation Breakeven 1.82% 1.71% +10 bps

The spread between the 10-yr Treasury note and the 2-yr Treasury increased one basis point to 106 basis points. This leaves the spread just above the 100-basis point area after sliding from last year's level of 150.

High-yield spreads saw their third contraction in a row as oil prices continued higher, but the rate of contraction has slowed. The high-yield-10-yr spread contracted six basis points to 600 basis points, likely reflecting optimism about the balance sheets of highly-leveraged oil producers. Although this spread has retraced its surge from the start of the year, it remains well above last year's level of 432 basis points.

Investment grade spreads also contracted, falling one basis point to 120 basis points. This spread is at levels from late 2015, but above last year's mark of 104.


The spread between the German Bund and the 10-yr Note slipped eight basis points to -159 basis points. This spread was at -183 basis points last year.

Inflation expectations saw a notable uptick with the five-year, five-year forward breakeven rate increasing 10 basis points to 1.82%. The rate has marked a fresh high for 2016, but it remains below last year's level of 2.14%.

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