Last week saw range-bound action in the equity market while Treasuries edged up, erasing losses from the previous week.
The past week was fairly quiet on the economic data front, but participants did receive the latest inflation data with September CPI increasing an in-line 0.3%. Core CPI, however, missed expectations, increasing 0.1% in September (Briefing.com consensus 0.2%). Investors also received some news from the housing front with September Housing Starts (1.047 million; Briefing.com consensus 1.168 million) missing expectations. That miss was somewhat offset by above-consensus Building Permits (1.225 million; Briefing.com consensus 1.164 million). Existing Home Sales hit a seasonally adjusted annualized rate of 5.47 million in September (Briefing.com consensus 5.30 million), which surpassed estimates.
On the whole, the economic data was largely supportive of a rate hike, which is a sentiment that was echoed by FOMC Vice Chair William Dudley, who said that a hike before year's end makes sense to him. The fed funds futures market believes that a rate hike is coming before the calendar turns, indicated by the 74.2% implied probability of a rate increase in December.
|Fed Fund Futures Rate Prediction||Dec. 2016 (74.2%)||Dec. 2016 (67.4%)||---|
|10yr Treasury - 2yr Treasury||90 bps||96 bps||-6 bps|
|High Yield - 10yr Treasury||462 bps||467 bps||-6 bps|
|Corp A - 10 yr Treasury||111 bps||112 bps||-1 bp|
|10 yr Bund - 10 yr Treasury||-178 bps||-179 bps||1 bp|
|5yr, 5yr Forward Inflation Breakeven||1.78%||1.81%||-3 bps|
The spread between the 10-yr Treasury note and the 2-yr Treasury note narrowed by 6 basis points to 90 bps. The spread is now back at levels from three weeks ago, hovering just beneath a five-month high.
High-yield spreads also declined by six basis points to a new 2016 low of 462. Oil prices that continue to drift higher as well as interest rates that remain historically low are helping to support junk bond prices. This economic environment is close to ideal for high-yield debt as corporate profits muddle along just enough to keep defaults low while not spurring large rate hikes that would push investors out of fixed-income assets.
Investment-grade corporate debt yields narrowed slightly with the Merrill Lynch Corporate 'A-Rated' Index retreating one basis point to 111 bps.
The 10-year German bund yield spread widened by one basis points. The spread now stands at -178 bps after the European Central Bank announced it will keep its deposit rate at -0.40% for some time longer. The European Central Bank's governing council held its last policy meeting on October 20.
Five-year, five-year forward inflation expectations declined by three basis points to 1.78%, leaving the 5y-5y spread just beneath this year's high. This rate is a market-based measure of inflation expectations that is closely followed by central banks. The recent, relatively steady, rise of this metric will encourage Fed policymakers in light of a decline in the Michigan Consumer survey's long-term inflation expectations to an all-time low in October.