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Market Update

Curve inversion accelerates, retail sales improve

November 21, 2022
  • william smith headshot


    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


The Treasury curve inversion accelerated sharply last week as market participants recalibrated their bets for Federal Reserve policy action in the face of hawkish Fed commentary and better-than-expected economic data.

Interest rates

  • The Treasury curve inverted further last week.
    • The 2s/10s basis, a popular measure of the Treasury curve’s shape, compressed nearly 20 basis points to -0.69% last week, the lowest level since 1982.
    • A steep climb in the front end of the curve drove the compression last week as the 2-year Treasury yield rose 17 basis points to 4.51%, and the 10-year yield held steady at 3.82%.
  • Hawkish Fed commentary drove the increases at the front end of the curve.
    • Several Fed officials suggested that the FOMC is far from ending the tightening campaign and left the door open for a fifth consecutive 75 basis point hike.
    • St. Louis Fed President James Bullard argued that the FOMC should raise rates “to at least 5% to 5.25% to curb inflation” and emphasized that the Fed would “err on the side of staying higher for longer” before changing course.
    • Bullard and others’ commentary had little impact on the expectations for the December meeting, but expectations for rate hikes next summer increased as market participants priced in an additional 25 basis point hike at the May FOMC meeting.
  • Finally, real yields ended the week markedly higher across the curve as back-to-back inflation readings proved softer than expected.
    • The 5-year real yield climbed 23 basis points to 1.71%, while the 10-year real yield rose a more modest 14 basis points to end the week at 1.57%.

Trading commentary

  • Hedging activity remained elevated last week as we experienced a return to a more balanced level of trading activity.
  • Strategies designed to protect against falling interest rates continue to take the lion’s share of executions.
    • Most clients opted to use highly efficient, plain vanilla interest rate swaps to manage their interest rate risk position while leveraging the floating-rate commercial real estate loan portfolio in the designated hedge accounting relationship.
    • Although most clients utilize the floating-rate loan portfolio to satisfy the hedge accounting requirements, we have seen some clients use either the floating-rate securities portfolio or the fixed-rate debt portfolio to accomplish the hedge accounting objective.
  • Separately, clients continue to extend the duration of their liabilities by coupling pay-fixed swaps with short-term wholesale borrowings, often from the FHLB.
    • While clients continue to hedge against rising interest rates, fixed-rate asset hedging activity has slowed in recent months and has been replaced by wholesale funding hedges.

Community banks see loan growth continue in Q3

  • U.S. community banks reported continued loan growth in the third quarter but at a slower pace than seen in previous quarters.
    • According to S&P Capital IQ, U.S. banks under $10 billion in assets saw a 3.4% sequential increase in loans during the third quarter, slower than the pace seen earlier in the year.
    • The data backs up what many executives have been sharing at recent earnings calls and conferences—loan portfolios continue to grow but at a slower pace than the first half of the year.
  • Geographically, the southeastern United States saw the most significant pick-up in loan growth in the third quarter, while the western United States fared the worst.
  • Recent earnings call commentary suggests that executives are optimistic about growth heading into 2023 but are weary of recession-related risks.

Economic data

  • A robust week of economic releases improved investor sentiment as most updates clocked in better than expected.
  • Retail sales increased 1.3% in October, the largest increase since February and the third consecutive monthly increase.
    • Analysts quickly commented that the strong October report reinforced expectations that the Fed will continue tightening financial conditions into next year.
  • The manufacturing outlook remains cloudy after the release of two east coast regional manufacturing reports.
    • The Empire Manufacturing Index unexpectedly moved back into expansionary territory after reporting contracting activity since August, while the Philadelphia Fed Business Outlook Survey plummeted further into negative territory.
    • Although the current conditions portion of the Empire report improved significantly, the “future” outlook measure declined to the second-worst level since 2001.
    • Both measures reported declining new orders and firming price pressures.
  • Finally, the Producer Price Index (PPI) increased less than the consensus estimate in October.
    • PPI’s lower-than-expected reading lent credence to the prior week’s Consumer Price Index release, which also suggested easing price pressures.
    • Notably, the core measure, which excludes the often-volatile food and energy components, remained unchanged from the month prior.

The look forward

  • Upcoming economic data releases
    • Chicago Fed National Activity Index – Monday
    • Richmond Fed Manufacturing Index – Tuesday
    • Durable Goods Orders – Wednesday
    • Jobless Claims – Wednesday
    • S&P Global Manufacturing / Services PMIs – Wednesday
    • New Home Sales – Wednesday
    • University of Michigan Consumer Sentiment Index – Wednesday
    • FOMC Meeting Minutes – Wednesday
  • Upcoming Federal Reserve Speakers
    • Daly – Monday
    • Mester, George, Bullard – Tuesday

Rates snapshot

Rates Snapshot 11 21 22

Market implied policy path (overnight indexed swap rates)

Market Implied Policy Path 11 21 22

Source: Chatham Financial

About the author

  • Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.