Updated: 06-28-2016

The stock market frolicked higher over the first four days of the past week, but investor sentiment turned on a dime after Thursday's referendum in the U.K. produced a vote to leave the European Union. The S&P 500 reversed from a two-week high, losing 3.6% on Friday, to end the week lower by 1.6% at its worst level in one month.

The Brexit-related uncertainty reversed the risk-on trends that began taking root early in the week with demand for U.S. Treasuries pressuring the 10-yr yield (1.41%) to levels not seen since mid-2012.

To little surprise, the rising global macroeconomic uncertainty exerted more pressure on rate hike expectations. The fed funds futures market sees a 0.0% chance of a rate hike before December, a month during which the likelihood of a rate hike is estimated at just 15.4%. In fact, the fed funds futures market estimates that a rate cut in December (15.8%) is more likely than a rate hike (15.4%).

06/24/2016 06/17/2016 Change
Fed Fund Futures Rate Prediction After Feb. 2017 (15.6%) After Feb. 2017 (27.4%) ---
10yr Treasury - 2yr Treasury 93 bps 92 bps 1 bp
High Yield - 10yr Treasury 609 bps 604 bps 5 bps
Corp A - 10 yr Treasury 135 bps 135 bps 0 bps
10 yr Bund - 10 yr Treasury -168 bps -165 bps -3 bps
5yr, 5yr Forward Inflation Breakeven 1.48% 1.41% 7 bps

The spread between the 10-yr Treasury note and the 2-yr Treasury note ticked up one basis point for the second consecutive week. The spread ended the week at 93 after peaking at 96 on Thursday. Overall, the spread remains near levels from late 2007 after setting a year-to-date low at 87 basis points on June 16. The continued weakness suggests that growth concerns remain at the forefront as the spread hovers well below last year's level of 170.

High-yield spreads increased as the high-yield-10yr spread rose 5 basis points to 609 after seeing an 18-basis point increase a week ago. Risk-off dynamics observed on Friday sent the spread back to levels seen in late May after a brief dip to 567 on Thursday, which represented a seven-month low.

Investment grade spreads were unchanged, holding at 135 basis points after a dip to 126 basis points on Thursday. This leaves the spread at levels from mid-June, and above last year's 118.

 

The spread between the German Bund and the 10-yr Note slipped three basis point for the second consecutive week, ending the week at -168. This spread was at -151 basis points last year.

Inflation expectations, as measured by the five-year, five-year forward breakeven rate, were on the rise throughout the week, peaking at 1.52% on Thursday. However, Friday's defensive posturing pressured the 5y5y forward rate to 1.48%, which represented a seven-basis point increase for the week. One year ago, the 5y5y forward was at 2.15%.


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