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Market Update

Treasury curve steepens; manufacturing data disappoints

August 22, 2022
  • william smith headshot


    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


Treasury yields ended the week mixed with the short end of the curve remaining unchanged and the mid- and long-term parts of the curve moving notably higher as market participants digested the latest economic data, last month’s FOMC meeting minutes, and a slew of corporate earnings releases.

Interest rates

  • After flattening for weeks, the Treasury curve steepened modestly last week.
    • The popular 2s/10s basis widened to -0.32% by the week’s end, sitting in a historically inverted position but pushing off of the two-decade lows set earlier this month.
    • Looking at current levels, the two-year Treasury yield ended the week at 3.25%, unchanged from the week prior, while the five-year and 10-year Treasury yields each rose 14 basis points to end the week at 3.11% and 2.98%, respectively.
  • Despite the release of the last FOMC meeting’s minutes and hawkish commentary from several Fed officials, expectations for Fed policy action in the near term held constant week-over-week.
    • Fed Funds futures market pricing at the close on Friday reflects a consensus expectation for a 75 basis point hike at the September FOMC meeting and an additional 1.25% of rate increases from current levels by the year’s end.
    • St. Louis Fed President James Bullard reinforced this sentiment in an interview on Thursday when he backed a 75 basis point hike at the next meeting and reiterated a desire to front-load interest rate hikes saying, I don’t really see why you want to drag out interest rate increases into next year."
    • The last FOMC meeting’s minutes proved to be more dovish than expected with “many participants” acknowledging that policy action works on a lag and that there is a risk of overtightening when trying to stabilize prices.
  • Although inflation expectations rose moderately in both the mid- and long-term parts of the curve, real yields moved moderately higher last week with the five-year and 10-year real yields ending the week at 0.39% and 0.43%, respectively.
  • Market participants and Fed officials will be looking toward next week’s consumer spending and sentiment data for more clues on how Fed policy action has impacted Main Street to date.

    Trading commentary

    • Elevated hedging activity continued last week as mid- and long-term rates moved notably higher during the back half of the week.
      • Several clients who are currently carrying out months-long hedging programs opportunistically jumped at the pickup in interest rates by executing receive-fixed interest rate swaps and interest rate collars to mitigate their risk to a falling interest rate environment.
      • To date, much of the downrate hedging activity has been indexed to either SOFR or Prime, but we have started to see some clients amass well-sized Term SOFR loan portfolios and use Term SOFR-based derivatives to hedge that exposure.
        • Given the lopsided flow dealer banks have seen for this particular index, pricing across market makers has been very competitive with many pricing transactions through the middle-market rate at execution.
    • Although much of the rising rate protection strategies we have assisted in implementing this year have looked to lock in or cap the cost of wholesale funding, we saw some clients look to hedge mortgages directly last week and use the new flexibility afforded by the recent improvements to the fair value hedging accounting framework via the portfolio layer method.

      Bank margins pick up on the back of rising interest rates

      • The net interest margin (NIM) for financial institutions across the country picked up in the second quarter as loan yields jumped and deposit costs remained mostly flat.
        • According to S&P Capital IQ, aggregate NIM moved 23 basis points higher in the last quarter, the largest sequential increase since 2010.
        • Many analysts have forecasted that NIM will continue to expand across the industry in the second half of 2022 as the Fed continues its tightening campaign and loan growth materializes.
          • Looking at second-quarter growth in aggregate, loans are up 3.9% sequentially, with both the consumer and commercial segments improving.

        Economic data

        • Market participants received largely mixed economic data last week.
        • The regional Empire Manufacturing Index plummeted to -31.3 in August, well below even the most dismal expectations from the economists surveyed and the second-lowest reading since 2001.
          • Much of the decline was attributed to sharp pullbacks in new orders and production levels.
          • In a bright spot, the Philadelphia Fed Business Outlook Survey, released on Thursday, improved sentiment somewhat after the Survey defied calls for a decline and instead expanded well above the level seen in July.
        • Retail sales expectedly dropped from the hot July reading, holding constant month-over-month.
          • The report proved encouraging to many analysts who highlighted the resilience of consumers facing four-decade high inflation.
        • Lastly, the mortgage industry continues to show signs of slowing from the blistering pace in 2021.
          • Recent updates to housing starts, existing home sales, and mortgage applications have all declined from levels seen one month ago.

          The look forward

          Upcoming economic data releases

          • Chicago Fed National Activity Index - Monday
          • S&P Global Manufacturing / Services PMI - Tuesday
          • Richmond Fed Manufacturing Index - Tuesday
          • New Home Sales - Tuesday
          • Durable Goods Orders - Wednesday
          • Jobless Claims - Thursday
          • 2Q GDP (second estimate) - Thursday
          • Core PCE - Thursday
          • Wholesale Inventories - Friday
          • Personal Spending - Friday
          • University of Michigan Consumer Sentiment - Friday

            Upcoming Federal Reserve speakers

            • Kashkari - Tuesday
            • Jackson Hole Economic Symposium - Thursday-Saturday
            • Chair Powell - Friday

            Rates snapshot

            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

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