Rate Brief 05-25-2015
Domestic spreads were little changed last week. Treasury yields declined from their Monday highs as the economic data were continually weaker than expected.
The sell-off in German bunds continued. Yields rose nearly 20 basis points (bps) by midweek before ending the week up a little more than 10 bps.
|Fed Fund Futures Rate Prediction
||Dec. 2015 (50.5)
||Dec. 2015 (53.9%)
|10yr Treasury - 2yr Treasury
|| 2 bps
|High Yield - 10yr Treasury
|Corp A - 10 yr Treasury
|10 yr Bund - 10 yr Treasury
|5yr, 5yr Forward Inflation Breakeven
Treasury bonds began the week with a large sell-off. The 10-year Treasury yield briefly exceeded 2.30% for the first time since December 2014 before retreating all the way back to 2.14% by the end of the week. The move coincided with weaker-than-expected retail sales and inflation readings.
The poor economic data weighed on the fed funds futures market, which reduced its probability for the first rate hike in December to a coin flip.
Both high-yield and investment grade corporate bonds moved in lockstep with Treasuries. Market participants did not increase the corporate default risk despite the poor economic data. Spreads were unchanged for the week.
Better-than-expected economic news from Europe kept upward pressure on German bund yields. The 10-year bund yield rose 11 bps to 0.66%. The spread between the German bund and the 10-year Treasury increased 10 bps to -148 bps, which is the smallest it has been on a consistent basis since the beginning of February.
The five-year, five-year forward inflation expectation remains range-bound between 2.05% and 2.15%. The weaker-than-expected PPI report and the continued decline in producer pipeline pressures had little impact on long-term inflation expectations.