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Market Update

Q4 GDP slows, funding pressures intensify

January 30, 2023
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    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


After falling for much of January, Treasury yields rebounded modestly last week as investors digested weak economic data and a slew of corporate earnings reports and awaited the early February FOMC monetary policy meeting.

Interest rates

  • Bucking the trend seen since the turn of the year, Treasury yields broke higher across a slightly flatter curve.
    • Treasury yields advanced in a tight range last week, with the two and 10-year Treasury yields each moving five basis points higher to end the week at 4.19% and 3.52%, respectively.
    • The curve remains significantly inverted, and the 2s/10s basis continues to hover near several decade lows at -0.70%.
    • Although the 2s/10s basis is off the historic lows set in December and has been inverted for over six months, the measure remains well below the one-year average of -0.16%.
  • In a quiet week for Fed speakers in the leadup to the January 31-February 1 FOMC monetary policy meeting, market participants’ expectations for policy changes are mostly unchanged from the week prior.
    • Current estimates suggest the FOMC will raise the Target Range by 25 basis points at Wednesday’s FOMC meeting and again by 25 basis points at the March monetary policy meeting.
    • Investors are split on a third 25 basis point hike, with current market pricing suggesting a 30% chance of a third 25 basis point hike at the May meeting.
    • Finally, market consensus points to several 25 basis point reductions to end 2023 and begin 2024.
  • Despite the modest rise in real rates across the curve last week, real yields turned lower as inflation expectations picked up on the back of a smaller-than-expected drop in the GDP Price Index released on Thursday.
    • Real yields at the five and 10-year points dropped four and six basis points to 1.29% and 1.19%, respectively.

Trading commentary

  • Hedging activity has increased notably in the second half of January.
  • Many clients have expressed a need for wholesale funding and have opted to lock in or cap the cost of the borrowings with interest rate swaps and caps.
    • Specifically, pay-fixed swaps have been the predominant interest rate derivative utilized in the current environment as clients pair the swap with a short-term FHLB Advance to extend the borrowing’s duration synthetically, often at a materially cheaper rate than can be obtained for the same term in the wholesale markets.
    • While hedging borrowings has grown in popularity since the turn of the year, we continue to see clients achieve a similar economic objective, mitigating liability sensitivity and protecting against further increases in interest rates, by utilizing the asset side of the balance sheet in a Portfolio Layer Method fair value hedging relationship.
  • Finally, programmatic hedging for a declining interest rate environment continued last week, although many clients have opted to use interest rate swaps rather than options in recent weeks.

Funding pressures intensify

  • With the fourth-quarter earnings season in full swing, U.S. financial institutions are offering their 2023 outlooks, and many have suggested that deposit pressures will continue into 2023.
  • According to an analysis conducted by S&P Global Market Intelligence, price pressures accelerated significantly in the fourth quarter relative to the third quarter.
    • Looking at the results in the report, the industry average rate paid on one-year certificates of deposit rose just over 100 basis points in 2022 to 1.31%.
    • Factoring in the FOMC’s rate hikes over the same one-year period, the industry average beta stands at approximately 30% and is expected to pick up in 2023, according to many analysts.
  • The comments from industry executives and analysis conducted by S&P Global align with the hedging activity we have seen in the second half of 2022, and the start of 2023 as clients continue expressing a need for wholesale funding amid deposit outflows.

Economic data

  • Market participants were the beneficiaries of several high-profile economic data releases last week.
  • S&P Global’s Manufacturing and Services PMIs each topped the consensus estimate and the prior month’s readings but remain in contraction territory.
    • Although many investors saw the monthly pickup as a welcomed development, the services PMI reading notched its seventh consecutive contractionary reading, and the manufacturing release suggested that price pressures firmed month-over-month.
  • The Fed’s preferred measure of inflation, core PCE, was released on Friday and indicated that core prices advanced 0.3% in December, in line with the consensus estimate but quicker than the 0.2% pace seen in November.
    • Services prices drove the monthly increase as goods prices continued to advance but at a slower pace than in 2022.
  • Lastly, according to a Commerce Department release on Thursday, the U.S. economy accelerated at a 2.9% annualized pace in the fourth quarter.
    • The fourth quarter figure marked a notable slowdown from the 3.2% pace in the third quarter and highlighted a weakness in consumer demand.
    • Looking ahead, the Atlanta Fed’s GDPNow tool, which attempts to forecast the current quarter’s GDP in real-time, projects the economy to advance at a 0.7% annualized pace in the first quarter, a notable shift in pace from the second half of 2022.

The look forward

Upcoming economic data releases

  • Dallas Fed Manufacturing Activity Index – Monday
  • MNI Chicago PMI – Tuesday
  • Conference Board Consumer Confidence Index – Tuesday
  • MBA Mortgage Applications – Wednesday
  • ADP Employment Report – Wednesday
  • S&P Global US Manufacturing PMI – Wednesday
  • ISM Manufacturing Index – Wednesday
  • Jobless Claims – Thursday
  • Factory Orders – Thursday
  • Durable Goods Orders – Thursday
  • January Non-Farm Payroll Report – Friday
  • ISM Services Index – Friday

Upcoming Federal Reserve Speakers

  • Fed Chair Powell Press Conference – Wednesday

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


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.