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Market Update

Treasury yields dip; Equities turn green

May 31, 2022
  • william smith headshot


    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


Volatility remained elevated last week as Treasury yields across the curve declined, while the major U.S. equity indices snapped a seven-week losing streak to finish in the green as investors weighed weak economic indicators with hopes that inflation has peaked.

Interest rates

  • While yields across the curve declined, the short-end saw the largest moves, steepening the curve, as the two-year Treasury yield fell 13 basis points to end the week at 2.47%.
    • After narrowing for much of the month, the 2s/10s basis widened modestly last week and now sits at 26 basis points, roughly 15 basis points below the 2022 average.
  • Although the Fed-watched five-year forward, five-year breakeven inflation rate continued to decline last week, the root of the decline in the short-end stemmed from an expectation for a less aggressive Federal Reserve in 2022.
    • Looking at Fed Funds futures pricing, market participants maintained an expectation for 50 basis point hikes at the next two meetings, consistent with the sentiment offered by Wednesday’s release of the FOMC meeting minutes which stated that most officials agreed that 50 basis point hikes would be appropriate “at the next couple of meetings.”
  • Notably, expectations for hikes beyond the next two meetings declined somewhat with market participants now pricing in just one 25 basis point hike in September compared to the 50 basis point hike priced in last week and seven quarter-point hikes by year-end compared to eight in the prior week.
  • After seeing a sharp run-up in April and holding much of the ground in May, real yields turned lower last week with the 10-year real yield falling 12 basis points to 0.11% and the seven-year real yield slipping back below zero to -0.07%.

                        Trading commentary

                        • The volatility experienced in rates markets has continued to precipitate hedging activity across our balance sheet risk management desk.
                        • Of note, we saw an uptick in clients unwinding pay-fixed swaps that were executed in 2020 & 2021, taking gains on those hedges that were designed to protect the investment portfolio from a pickup in rates.
                          • In directionally similar moves, we saw clients continue to execute receive-fixed swaps, primarily using the floating-rate loan portfolio as the hedge vehicle, to mitigate asset sensitivity and earn roughly 145 basis points in implied initial compensation.
                        • As we move through the second quarter, SOFR has emerged as the dominant index used in the receive-fixed swap hedges, although we continue to see activity on alternative indices such as Fed Funds and Prime.
                        • Looking at loan level hedging activity, the back-to-back hedging desk saw significant activity last week, as borrowers looked to lock-in long-term fixed rate financing prior to the month’s end.

                                              C&I loans see Q1 growth

                                              • After lagging many loan segments in 2021, Commercial and Industrial (C&I) loans saw outsized gains in the first quarter compared to other loan segments.
                                                • Although C&I loan balances are down industrywide in the last year, the first quarter saw a notable increase with total balances increasing 2.5% from the fourth quarter of 2021 and 23 of the top 25 institutions with the highest C&I balances reporting sequential increases, according to S&P Capital IQ
                                              • Much of the Q1 increase in has been attributed to companies investing in projects halted by the pandemic and building up inventories in the face of widespread supply chain disruptions.
                                              • Looking ahead, much of the Q1 commentary from the largest U.S. financial institutions has expressed optimism about Q2 loan pipelines.

                                                                                  Economic data

                                                                                  • Last week’s slate of economic data releases showed signs of a slowdown as both broad economic indicators and consumer sentiment dipped.
                                                                                  • Tuesday brought the release of S&P Global’s preliminary Manufacturing and Services PMIs and both suggested that the U.S. economy is slowing.
                                                                                    • Looking at the manufacturing release, May’s preliminary report fell below both the consensus expectation and April’s reading as new orders and production cooled and order backlogs increased.
                                                                                  • On the services front, the new business measure fell to its lowest level since the summer of 2020 as customers grappled with higher prices from decades-high inflation.
                                                                                  • The University of Michigan Consumer Sentiment Index fell to 58.4 in May, far below the 65.2 reading seen in April and the lowest level on record since September 2011.
                                                                                    • Consumers turned sour on both the short-term and long-term outlooks for the U.S. economy, with measures of both current conditions and future expectations falling notably in May.

                                                                                          The look forward

                                                                                          Upcoming economic data releases

                                                                                          • MNI Chicago PMI - Tuesday
                                                                                          • Conference Board Consumer Confidence Index - Tuesday
                                                                                          • Construction Spending - Wednesday
                                                                                          • ISM Manufacturing Index - Wednesday
                                                                                          • Beige Book - Wednesday
                                                                                          • ADP Employment Report - Thursday
                                                                                          • Jobless Claims - Thursday
                                                                                          • Factory Orders - Thursday
                                                                                          • Durable Goods Orders - Thursday
                                                                                          • May Non-Farm Payroll Report - Friday

                                                                                                                                  Upcoming Federal Reserve speakers

                                                                                                                                  • Williams, Bullard - Wednesday
                                                                                                                                  • Logan, Mester - Thursday
                                                                                                                                  • Brainard - 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


                                                                                                                                                                        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.