Updated: 08-17-2017

The yield curve saw some flattening for the second week in a row, as soft economic data and growing geopolitical tensions surrounding North Korea caused participants to adjust their risk exposure.

For the second week in a row, investors received cooler than expected inflation figures. July PPI and core PPI both ticked down 0.1% (Briefing.com consensus 0.2%) while July CPI ticked up 0.1%, but was shy of the Briefing.com consensus (0.2%). On a year-over-year basis, July CPI increased 1.7%, accelerating slightly from a 1.6% year-over-year increase in June.

On Tuesday afternoon, U.S. President Donald Trump warned that North Korea will be "met with fire and fury like the world has never seen" if the country continues issuing threats against the United States. Mr. Trump's comment came just a few hours after the Washington Post reported that North Korea now has the capability to outfit its missiles with miniaturized nuclear warheads.

Selling extended into Wednesday's session after Pyongyang responded to President Trump's comment by saying that it's preparing a plan to launch missiles towards the U.S. territory of Guam. The selling on Tuesday and Wednesday was very modest, but it accelerated on Thursday. The S&P 500 lost 1.4% for the week.

Rate hike expectations were pushed out notably, with the funds futures market not seeing a 50.0%+ chance of another hike until the middle of 2018. FOMC voters Kaplan and Kashkari spoke last week, and both noted a preference for seeing more evidence towards reaching the 2.0% inflation goal before calling for another hike.

8/11/2017 8/04/2017 Change
Fed Fund Futures Rate Prediction May 2018 (50.9%) Dec. 2017 (50.4%)  NA
10yr Treasury - 2yr Treasury 89 bps 91 bps  -2 bps
High Yield - 10yr Treasury 398 bps 371 bps  27 bps
Corp A - 10 yr Treasury 100 bps 93 bps  7 bps
10 yr Bund - 10 yr Treasury -183 bps -183 bps  UNCH
5yr, 5yr Forward Inflation Breakeven 1.93% 1.94%   -1 bp

Once again, the yield spread between the 10-yr Treasury note and the 2-yr Treasury note narrowed, coming in two basis points to 89 bps in a curve-flattening trade.

Soft economic data and an uptick in geopolitical concerns led to another week of widening in the spreads for both high-yield and investment grade corporates over Treasuries.

The spread between the 10-yr German bund yield and the 10-yr Treasury yield held unchanged at -183 basis points after falling eight basis points two weeks ago. Both U.S. Treasuries and German bunds saw increased interest during the week as global investors sought increased safety.

Market expectations for five-year, five-year forward inflation dipped to 1.93% from 1.94% after declining from 1.97% two weeks ago.

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