Rate Brief 02-23-2015
The economic data continued its disappointing run last week. Industrial production, housing starts, and producer price levels all came in below expectations. Despite the poor economic performance, the 10-year Treasury yield ended the week 11 bps higher than its Feb. 13 close.
On top of the economic weakness in the United States, concerns about the viability of Greek debt were again in the forefront in Europe. German bund yields increased slightly over the week.
|Fed Fund Futures Rate Prediction
||Sep. 2015 (57.6%)
||Sep. 2015 (58.9%)
|10yr Treasury - 2yr Treasury
|High Yield - 10yr Treasury
|Corp A - 10 yr Treasury
|10 yr Bund - 10 yr Treasury
|5yr, 5yr Forward Inflation Breakeven
The Treasury yield curve widened slightly over the last few days. The move was in-line with the small downshift in fed funds futures expectations.
Corporate spreads in both the high yield and investment grade space narrowed. Higher oil prices likely improved the perspective on the intermediate outlook in the energy sector, which reduced some of the default risk built into the high yield energy sector.
Relatively stronger economic growth prospects in the U.S. helped the 10-year Treasury yield increase at a faster rate than the 10-year German Bund.
Even though the PPI's finished goods index (PPI headline under the old methodology) declined at its fastest rate since November 2008, the 5-year, 5-year forward inflation breakeven increased 9 bps to 2.13%. The Fed's implied CPI target is roughly 2.5%, which means the market still believes that inflation growth will undershoot the Fed's goal.