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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
1
U.S. Interest Rates
Chartbook May 2017
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
Takeaways
FOMC minutes and Fedspeak have signaled FOMC
readiness to raise the Fed funds rate by another 25bp at its
next meeting in June. The Committee’s commitment to the
gradual reduction of its balance sheet “later this year” remains
unchanged and will likely be green lighted once the policy rate
extends midway towards the median of the FOMC projected
long-run rate of 3.00%
“With the federal funds rate projected to be in the range that is
midway to the Committee's projection of the long-run value of the
federal funds rate later this year, I would consider it reasonable to
assess that this threshold will have been attained before too long”
May 30, 2017, Governor Lael Brainard Speech
“I would view it as appropriate to continue to gradually raise rates. I
would also see it as appropriate to begin the process of reducing
the size of the balance sheet later this year”
June 1, 2017, Governor Jerome Powell Speech
The Fed funds futures market is aligned with the FOMC,
pricing in two more rate hikes in 2017 with a 98% implied
probability for the next rate increase in June, followed by a
rate increase in December
The yield curve flattens under newly resumed downward
pressure on long-term yields as inflation expectations and
term premium edge down
The baseline is for a gradual increase in long-term yields
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
Unconventional Monetary Policy
3 Source: BBVA Research, Federal Reserve Board and Haver Analytics
FEDERAL FUNDS RATE AND 10-YEAR TREASURE NOTE
(%)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
08 09 10 11 12 13 14 15 16 17
10-Year Treasury Yield Federal Funds Rate
First MBS Purchase QE2
"Operation Twist"
QE3
Taper
Tantrum 1st
Rate Hike
End of QE3 3rd
Rate Hike
2nd
Rate Hike
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
June Rate Hike Probability is at 98%
4 Source: BBVA Research and Bloomberg
FED FUNDS FUTURES IMPLIED PROBABILITIES, FOURTH 25BP HIKE
(%)
-
10
20
30
40
50
60
70
80
90
100
2/22/2017 5/3/2017 5/24/2017 5/31/2017
Jun-17 Jul-17 Aug-17 Sep-17
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
Fifth Rate Hike is Priced in for 4Q17
5 Source: BBVA Research and Bloomberg
FED FUNDS FUTURES IMPLIED PROBABILITIES, FIFTH 25BP HIKE
(%)
-
10
20
30
40
50
60
70
80
90
100
05/03/17 05/24/17 05/31/17
Sep-17 Oct-17 Nov-17 Dec-17
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
Fed Funds Futures Curve
6 Source: BBVA Research and Bloomberg
FED FUNDS FUTURES – MOST RECENT, 1 WEEK PRIOR, 1 MONTH PRIOR, 3 MONTHS PRIOR
(%)
0.500
0.625
0.750
0.875
1.000
1.125
1.250
1.375
1.500
1.625
1.750
1.875
2.000
May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Feb-19 May-19 Aug-19 Nov-19
2/22/2017 5/3/2017 5/24/2017 5/31/2017
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
Dealers’ expectations match the FOMC policy firming path
for the end of 2017 to 2018
7 Source: BBVA Research, Federal Reserve Bank of New York and Federal Reserve Board
PROJECTED PACE OF POLICY FIRMING
(%)
0.250.500.751.001.251.501.752.002.252.502.753.003.253.50
Dealers Survey Median, May 2017 (±) 25th Percentile
FOMC Mean, Mar. 14-15, 2017 (EOP) FOMC Median, Mar. 14-15, 2017 (EOP)
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
BBVA Fed Funds Firming Pace Forecast
8 Source: BBVA Research, Federal Reserve Board and Haver Analytics
FEDERAL FUNDS RATE
(%, Upper Bound, End of Period)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20
Actual Baseline Upside Downside
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
BBVA Baseline Forecasts of Treasury Bill Yield
9 Source: BBVA Research, Federal Reserve Board and Haver Analytics
3-MONTH TO 12-MONTH RATES
(%)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
3M 6M 12M
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17
Index Mean since 2003
Long-Term Yield Volatility Has Normalized Below Historic Mean
10 Source: BBVA Research, Chicago Board Options Exchange and Bloomberg
10-YEAR U.S. TREASURY NOTE VOLATILITY
(Daily index)
Index measures a constant 30-day expected volatility of 10-Year Treasury Note futures prices, and is calculated based on transparent pricing from the Chicago Board of Trade's actively
traded options on the Treasury Note futures
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
Downward Pressure on Term Premium Resumed
11 Source: BBVA Research and Federal Reserve Board
10-YEAR U.S. TREASURY TERM PREMIUM & MARKET INFLATION EXPECTATIONS
(Weekly, %)
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
10-Year U.S. Treasury Yield Average Expected Future Short Rates
Implied 10-Year Spot Inflation Rate Ex-Ante Term Premium
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
Mid-Term Duration-Risk Compression Has Stabilized
at 11 Basis Points
12
Calculated as the difference between 5-Year and 3-Year term premium reported by the New York Fed ACM (Adrian, Crump, and Moench) five-factor, no-arbitrage term structure
model incorporating pricing factors.
DURATION-RISK COMPRESSION
(Daily, %)
Source: BBVA Research, Federal Reserve Bank of New York and Haver Analytics
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
5-Year to 3-Year Term Premium Spread Historic Mean since 1971
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
10-Year to 5-Year Term Premium Spread Historic Mean since 1971
Long-Term Duration-Risk Compression Has Stabilized
at 10 Basis Points
13
Calculated as the difference between 10-Year and 5-Year term premium reported by the New York Fed ACM (Adrian, Crump, and Moench) five-factor, no-arbitrage term structure
model incorporating pricing factors.
DURATION-RISK COMPRESSION
(Daily, %)
Source: BBVA Research, Federal Reserve Bank of New York and Haver Analytics
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
Futures Declined, Discounting a 6bp Raise in 10YTN Yields
Over the Next 2 Quarters
14 Source: BBVA Research and Bloomberg
10-YEAR U.S. TREASURY YIELD FUTURES – MOST RECENT, 1 WEEK PRIOR, 1 MONTH PRIOR, 3 MONTHS PRIOR
(%)
2.825
2.950
3.075
3.200
Jun-17 Sep-17 Dec-174/4/17 5/2/17 5/23/17 5/30/17
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
10-Year Treasury Yield Forecasts
15
* National Association for Business Economics (NABE) Outlook median forecast compiled from a panel of NABE members. Last release date March 26, 2017
** Survey of Professional Forecasters (SPF) conducted by Federal Reserve Bank of Philadelphia. Last release date May 12, 2017
*** Congressional Budget Office (CBO). Last release date January 24, 2017
**** Administration: 2018 Budget. Last release date May 23, 2017
10-YEAR U.S. TREASURY YIELD
(%)
Source: BBVA Research, NABE, FRB Philadelphia, CBO and Haver Analytics
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
07 08 09 10 11 12 13 14 15 16 17 18 19 20
Historic Baseline Downside Risk
Upside Risk NABE* (EOP, Mar 26) SPF** (EOP, May 12)
CBO*** (Yr. Avg, Jan 24) Administration**** (Yr.Avg, May 23)
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
Yield Curve Slope Forecasts
16 Source: BBVA Research, Federal Reserve Board and Haver Analytics
TREASURY YIELD CURVE SLOPE
(%, 10Y-2Y)
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
07 08 09 10 11 12 13 14 15 16 17 18 19 20
Historic Baseline Downside Risk Upside Risk
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
Treasury Yield Curve Baseline Forecasts
17 Source: BBVA Research, Federal Reserve Board and Haver Analytics
U.S. TREASURY YIELD CURVE
(%)
Treasury yield curve is estimated with a three-factor no-arbitrage model linked to macroeconomic factors measuring growth, inflation and monetary policy. Estimates are based on
BBVA research baseline forecast for GDP growth, inflation and Fed funds rate.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
2Y 3Y 5Y 10Y 30Y
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
Yield Curve Forecasts
18
Treasury yield curve is estimated with a three-factor no-arbitrage model linked to macroeconomic factors measuring growth, inflation and monetary policy. Estimates are based on
BBVA research baseline forecast for GDP growth, inflation and Fed funds rate.
TREASURY YIELD CURVE BASELINE FORECAST
(%, End of Period)
Source: BBVA Research, Federal Reserve Board and Haver Analytics
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
10-Year Average 2016 2017 2018 2019
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
Swap Curve Baseline Forecasts
19
U.S. SWAP RATES
(%)
Source: BBVA Research, Federal Reserve Board and Haver Analytics
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
2Y 3Y 5Y 10Y 30Y
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
LIBOR Curve Baseline Forecasts
20 Source: BBVA Research, Federal Reserve Board and Haver Analytics
U.S. DOLLAR LIBOR RATES
(%)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
1M 3M 6M 12M
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U.S. INTEREST RATE CHARTBOOK │ MAY 2017
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U.S. on behalf of itself and its affiliated companies (each BBVA Group Company) for
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