Treasury yields rise in buildup to FOMC meeting, jobless claims jump

Treasury yields rise in buildup to FOMC meeting

• After dropping modestly the week prior, Treasury yields reversed course and climbed moderately higher across the curve last week.

Portfolio Layer Method dominates hedging activity

• Rising rate hedging activity continued last week, with most clients leveraging the new improvements to the fair value hedging framework and using the Portfolio Layer Method to convert fixed-rate assets to floating synthetically.

Services sector data improves, jobless claims rise

• Investors focused their attention on updated services sector readings and the weekly jobless claims figure in a light week for economic data releases.

Treasury yields rise in buildup to FOMC meeting

• After dropping modestly the week prior, Treasury yields reversed course and climbed moderately higher across the curve last week.
  • The short end of the curve experienced the most significant moves, with the 2-year yield climbing nearly 10 basis points to 4.59% and the 10-year rising a more modest six basis points to 3.75%.
  • The robust rise in the front end drove the 2s/10s basis deeper into inverted territory to -0.87%.
    • While the curve inverted further in early March, Friday’s closing level represents the widest basis since March 10.
• With the June FOMC meeting fast approaching, Federal Reserve officials entered the blackout period before the policy meeting and refrained from public speaking engagements during the week.
  • Investors continued to tweak their expectations for Fed policy, however, and pared back expectations for Federal Reserve interest rate cuts in 2023.
  • Market participants now expect just one more hike in July and similarly expect just one cut for 2023, one fewer cut than investors expected the week prior.
• Attention now turns to Wednesday’s FOMC policy rate decision, Jerome Powell’s post-decision commentary, and the latest release of the FOMC’s Summary of Economic Projections.

Portfolio Layer Method dominates hedging activity

• As noted previously, liability-sensitive clients protecting against further increases in interest rates have driven the vast majority of hedging activity observed across our client base this year.
  • Rising rate hedging activity continued in earnest last week, with most clients leveraging the new improvements to the fair value hedging framework and utilizing the Portfolio Layer Method to convert fixed-rate assets to floating synthetically.
  • While wholesale borrowing hedging remains popular, many clients have found the flexibility offered by the Portfolio Layer Method particularly attractive, providing an outlet for hedging rising rates without the need to commit to wholesale borrowings for the life of the hedge.
• On the loan-level hedging side, hedging has also continued at an elevated level.
  • Despite rates rising significantly over the last month, banks continue to price conventional fixed-rate loans at rates substantially higher than what borrowers can get via a floating-rate loan and swap.
  • With market rates having settled somewhat following the rapid rise last month, borrowers with existing floating-rate debt have been increasingly willing to hedge now and recognize immediate interest savings, rather than continue to pay a higher floating rate and wait for another possible dip before hedging.

Services sector data improves, jobless claims rise

• Investors focused their attention on updated services sector readings and the weekly jobless claims figure in a light week for economic data releases.
• According to the S&P Global U.S. Services PMI, the U.S. services sector expanded for the fourth consecutive month as the index reached its highest level since April 2022.
  • Notably, price pressures appear to be easing as the indices’ price component fell to its lowest level since March.
• The ISM Services Index, released Wednesday, painted a gloomier picture of the services economy after the May reading fell to its lowest level of the year on sluggish new order demand.
  • Although the May reading touched its lowest level of the year, the services sector remains in expansionary territory, with 11 of the 18 measured industries reporting growth in May.
• Finally, jobless claims unexpectedly increased to 261,000 during the week of June 3, the highest reading since October 2021.
  • The 28,000 claims week-over-week jump marked the largest weekly increase since July 2021 and topped all estimates in a Bloomberg economist survey.

The look forward

Upcoming economic data releases

• Consumer Price Index – Tuesday
• Producer Price Index – Wednesday
• Retail Sales – Thursday
• Jobless Claims – Thursday
• Empire Manufacturing Index – Thursday
• Philadelphia Fed Business Outlook Survey – Thursday
• Industrial Production – Thursday
• University of Michigan Sentiment – Friday

Upcoming Federal Reserve Speakers

• Jerome Powell post-FOMC press conference – Wednesday

Rates snapshot

Market implied policy path (overnight indexed swap rates)