Updated: 10-20-2017

The past week saw the Treasury market record its first weekly gain in a month, but the yield curve continued flattening as longer-dated Treasuries outperformed shorter maturities. Week-long buying along the longer end pressured the 10-yr yield back below its 200-day moving average (2.314%), which has served as recent resistance for the benchmark yield.

Market participants received the FOMC Minutes from the September meeting, which showed growing concern among policymakers about persistently low inflation readings and an acknowledgement that low inflation measures may not be transitory after all. Interestingly, Fed officials appear comfortable staying on the rate-hike path despite worries about inflation.

Last week's flattening in the yield curve compressed the 2s10s spread to 76 bps. This coincides with the 2016 low and it represents the tightest level for the 2s10s spread since late 2007. Similarly, the 2s30s spread also collapsed to levels not seen since the end of November 2007, suggesting the market has serious doubts about forward growth expectations. A flat yield curve reflects the market's expectations for a slowdown in growth while an inversion would be viewed as a sign of an impending recession.

The flattening yield curve has not deterred investors from seeking returns in corporate bonds, leaving the investment grade spread at its lowest level in three years.

10/16/2017 10/9/2017 Change
Fed Fund Futures Rate Prediction December 2017 (87.8%) December 2017 (88.0%)  NA
10yr Treasury - 2yr Treasury 76 bps 83 bps -7 bps
High Yield - 10yr Treasury 368 bps 361 bps  7 bps
Corp A - 10 yr Treasury 87 bps 86 bps 1 bp
10 yr Bund - 10 yr Treasury -190 bps -192 bps  2 bps
5yr, 5yr Forward Inflation Breakeven 2.01% 1.95%  6 bps


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