Credit Market Report

December 15, 2017

Yield curve flattens further on growing expectation for Fed to raise rates: Long-dated yields fell, while short-dated yields rose, on Thursday after strong economic data but weak expectations for future inflation strengthened the likelihood the Federal Reserve would raise rates more aggressively next year.

Influencing Factors:

  • The yield curve, a line tracing a bond’s maturities and its respective yield, flattened after the Fed’s rates projections and economic forecasts on Wednesday highlighted the central bank’s willingness to normalize monetary policy regardless of a lack of inflation. Investors suggested expectations of further hikes have sped up the curve’s flattening as it demonstrated the Fed was not patient enough for inflation to pick up before taking action.
  • Long-dated yields were also capped after European Central Bank President Mario Draghi repeated his customary dovish remarks, saying an “ample degree” of stimulus was still needed to boost inflation. That helped frustrate expectations the central bank would shift its language from easing to tightening in anticipation of a conclusive end to its bond purchases in Sept. 2018.
  • “Earlier this year, the Fed signaled an unwillingness to be deterred by lowflation in its attempt to put a ‘gradual removal of accommodation’ plan into practice. This became most evident to the market at the September FOMC meeting when the preceding series of disappointing core-inflation reads didn’t shift the Fed’s dot-plot or tapering ambitions,” wrote Ian Lyngen and Aaron Kohli, fixed-income strategist at BMO Capital Markets. The dot plot is an aggregate of the senior Fed officials’ estimates of future interest rates.

Fixed Rate Indices

Maturity Coupon Yield Change
2-year... 11/19 1 2/8% 1.811%   ( + )
5-year... 11/22 1 6/8% 2.128%   ( + )
7-year 11/24 2% 2.261%

  ( + )

10-year 11/27 2 3/8% 2.346%   ( - )
30-year 11/47 3 % 2.710%   ( - )
Treasury Rates are as of 12-14-2017 as reported by The Wall Street Journal.

Prime Rate

Prime... 4.25%
Last effective change 6-15-2017

Floating Rate Indices

30-day LIBOR..... 1.49078%
90-day LIBOR..... 1.60042%
6-month LIBOR... 1.76769%
1-year LIBOR...... 2.04263%

London Interbank Offered Rates are as of 12-14-2017 as reported by The Wall Street Journal.

Spread Markets

Maturity Spreads Rate
2-year SWAP.... 20.30 bps 2.0140%
5-year SWAP.... 7.90 bps 2.2070%
7-year SWAP.... 2.00 bps 2.2810%
10-year SWAP... 2.50 bps 2.3710%

SWAP Rates are as of 12-14-2017 as reported by the Wall Street Journal.