Interest rates continue rising amidst positive inflation data and COVID-19 stimulus
The House of Representatives approved the Senate-passed $1.9 trillion COVID-19 relief bill on Wednesday, with President Biden officially signing it into law on Thursday afternoon. The bill will bring relief to hard-hit industries, extend unemployment benefits (which otherwise would have expired Sunday) and send another round of stimulus checks to individuals and families.
Treasury Secretary Janet Yellen tried to curb market fears that the COVID relief bill would cause a rise in inflation, citing pre-pandemic unemployment levels corresponding with minimal inflation. CPI data released Wednesday verified Yellen’s stance. Consumer prices rose 0.4% in February (after rising 0.3% in January), right in line with market expectations. Core CPI, generally considered a better indicator of long-term drivers of inflation, only rose 0.1%.
Equity markets crept up after CPI eased inflation concerns and in the wake of the COVID-19 stimulus. The S&P 500 rebounded from a slow start on Friday to set yet another closing high. The NASDAQ, comprised largely of technology stocks, has lagged the market and fallen 5% over the last month.
The U.S. job market continued its positive trend, with weekly jobless claims coming in at 712,000. Expectations were 725,000 after seeing 745,000 the week prior. Despite the positive trend, this is still the 51st straight week of jobless claims above 695,000.
Treasury yields remained on a steady climb this week. The 10-year Treasury closed Friday at 1.64%, its highest rate since February 2020. Rates have risen ever since the calendar flipped to 2021. Since the beginning of January, the 10-year yield is up over 70 basis points while the 5-year yield is up nearly 50 bps. Chatham’s corporate clients continue to assess the benefits of pre-issuance hedging in today’s environment. Locking in today’s yield curve helps to protect against rates rising higher than expected in the future.
(Related insight: Read “Managing interest rate risk on future debt issuances.")
Experts continue to warn of the potential for U.S. dollar weakening despite signs that things have plateaued. While dollar weakening was a market narrative in 2020, the U.S. dollar Index has risen year-to-date. USD-JPY, for example, closed Friday above 109, a level last seen during the early days of the pandemic when investors were flocking to the dollar.
(Related insight: Watch “An Altered Currency Landscape and Impact to Corporate Hedging Programs”)
A drone strike on a Saudi oil facility early last week caused a brief spike in oil prices. Prices quickly settled after it became clear that the attack would not affect oil output. Oil continued its upward trend, spurred on by OPEC’s decision to maintain current production levels.
(Related insight: Read “Using commodity collars to manage market volatility”)
The week ahead
The FOMC is scheduled to meet on Tuesday and Wednesday of this week. The market will keep a close eye on any comments made by FOMC members following these meetings. Market expectations are that rates will remain the same.
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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.21-0070
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