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Market Update

Long-term yields continue march higher

Date:
October 12, 2021
  • william smith headshot

    Authors

    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA

Summary

After falling substantially in the final week of the third quarter, the major U.S. equity indices started the fourth quarter on solid footing, each moving higher last week, while long-term Treasury yields continued their march higher, as investors digested mixed economic data releases, primarily the September non-farm payroll report, and the latest debt ceiling developments.

September non-farm payroll

  • According to the Labor Department, the U.S. economy added 194,000 jobs in September, the smallest monthly gain of the year and well below the 500,000 consensus estimate.
  • In aggregate, the July and August job figures were revised higher by 169,000 jobs.
  • Unexpectedly, the unemployment rate fell from 5.2% to 4.8% in September.
  • Average hourly earnings picked up 0.6% over the month, highlighting the existing wage pressures that employers are forced to reckon with as the nation-wide labor shortage persists in the face of the expiration of many enhanced unemployment insurance benefits.
  • While the headline figure missed expectations substantially, analysts still see a November tapering announcement by the FOMC as a distinct possibility.

Debt ceiling

  • With the Treasury indicating that the U.S. would default on its debt around October 18 should the debt ceiling remain at its current level, Senate Minority Leader Mitch McConnell offered a $480 billion short-term debt ceiling increase deal on Wednesday after previously indicating that Republicans would not assist Democrats in suspending or increasing the debt ceiling.
  • While the current measure would avert a near-term catastrophe, the short-term increase will only fund the government through early December and will require additional legislation in the coming months to avoid a similar scenario in December.
  • The Senate passed the measure on Thursday and the House of Representatives is expected to pass the measure early next week.
  • In a letter to President Biden on Friday, McConnell indicated that he “will not provide assistance again,” increasing the likelihood that a suspension or increase to the debt ceiling will be achieved via a Democrat-only reconciliation bill.

Interest rates

  • Long-term Treasury yields continued to push higher last week with the 10-year Treasury yield finishing the week at 1.61%, 13 basis points higher than where it began the week.
  • A substantial portion of last week’s rise in the 10-year Treasury yield can be attributed to a rise in inflation expectations.
    • The 10-year breakeven inflation rate increased roughly 13 basis points over the week to 2.51%.
  • The Treasury curve ended the week markedly steeper than where it began the week.
    • The 2s/10s basis climbed roughly 10 basis points over the week to 1.29%.
  • The relative compensation for hedging downward rate moves has picked up in recent weeks with the positive carry on a 5-year receive-fixed Fed Funds swaps increasing roughly 23 basis points in the last month to 85 basis points.
  • At the same time, conversations regarding up-rate hedging have increased notably in the last month as long-term rates have moved up and Fed hiking expectations have moved forward.

The look forward

Upcoming economic data releases

  • Consumer Price Index – Wednesday
  • FOMC Sep 22 Meeting Minutes - Wednesday
  • Producer Price Index – Thursday
  • Jobless Claims – Thursday
  • Empire Manufacturing Index – Friday
  • Retail Sales – Friday

Upcoming Federal Reserve speakers

  • Clarida, Bostic, Barkin – Tuesday
  • Brainard, Bowman – Wednesday
  • Bullard, Bostic, Barkin, Daly, and Harker – Thursday
  • Bullard, Williams - Friday

Rates snapshot

Market implied policy path (Overnight indexed swap rates)

Source: Chatham Financial

About the author

  • Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


Disclaimers

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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.

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