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Market Update

U.S. consumer shows resilience; Treasury curve flattens

May 23, 2022
  • william smith headshot


    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


Fears of a coming recession and weak earnings from some of the largest U.S. companies continued to dampen investor sentiment and dominate headlines last week with the S&P 500 slipping into bear market territory and long-term Treasury yields taking another leg lower.

Interest rates

  • Despite steepening to start the month, the Treasury curve has flattened for most of this month and last week saw a continuation of the flattening activity with the 2s/10s basis narrowing roughly 14 basis points to 0.19%, well below the 0.83% yearly average.
  • After falling 19 basis points the week prior, the 10-year Treasury yield dropped 15 basis points by Friday to end the week at 2.78%, far from the multi-year high of 3.14% set just over two weeks ago.
    • Much of the decline in the 10-year yield came as a result of declining inflation expectations as the 10-year breakeven inflation rate and the Fed-watched five-year forward, five-year breakeven inflation rate each dropped 15 basis points, continuing the trend that began at the start of the month.
  • Looking at Fed Funds futures pricing, market expectations for Fed rate hikes remained mostly unchanged from the week prior with current expectations suggesting that the Fed will raise the Federal Funds Target Rate 50 basis points at the next two FOMC meetings and 2% from current levels by the year’s end.
  • Looking at real yields, the long-end of the curve changed little with the 10-year real yield dropping two basis points to 0.23%, while the 30-year real yield climbed seven basis points to 0.64%.

                      Trading commentary

                      • Activity across our balance sheet risk management desk remained elevated last week as rate volatility continued in earnest.
                      • With the decline in interest rates over the last two weeks, we have seen some clients look to capitalize on the moves lower and execute strategies designed to mitigate further declines in the investment portfolio and protect against further OCI degradation by using pay-fixed interest rate swaps to hedge the investment portfolio directly.
                        • The recent improvements in the fair value hedge accounting framework via the portfolio layer method have made investment portfolio hedges easier to implement, given the flexibility afforded by the FASB’s new guidance.
                      • Separately, many clients continue to execute down-rate hedging strategies to pull income forward and mitigate asset sensitivity.
                        • Many of these strategies have targeted the floating-rate loan portfolio with most clients using receive-fixed swaps as the derivative product in the transaction, although recently we have seen an uptick in option-based products, namely zero-cost collars.
                      • Finally, our back-to-back hedging desk has seen significant activity from borrowers this month looking to lock in long-term fixed-rate financing as the economic and inflation outlook remains cloudy.

                                          Real estate lending sees growth in Q1

                                          • With much of the first-quarter earnings season behind us, we have seen many U.S. financial institutions report moderate loan growth to start the year with the expectation for additional growth in the coming quarters.
                                          • According to S&P Capital IQ, institutions between $3 and $10 billion in total assets saw total loans increase 2.4% on average in the first quarter, excluding PPP loans.
                                            • Looking at the 20 largest community banks, three-quarters of those institutions reported quarter-over-quarter loan growth.
                                          • While the commercial and industrial loan segment continued to see declines, commercial real estate and multifamily loans picked up significantly rising 2.5% and 2.7% respectively.

                                                                            Economic data

                                                                            • After receiving inflation updates the week prior, market participants looked to the manufacturing industry releases last week for clues on the state of the industry and the broader economy.
                                                                            • Both regional surveys released last week saw notable declines below both the consensus expectation and the levels reported in March.
                                                                              • The Empire Manufacturing Index defied calls for a modest decline and instead plummeted 35 points to -11.6, falling into contraction territory on the back of substantial declines in new orders and shipments.
                                                                                • In a bright spot, both the prices paid and prices received components of the release declined in April, although remain elevated in a historical context.
                                                                              • The Philadelphia Fed Business Outlook Survey also declined well in excess of the consensus estimate, falling to 2.6 compared to the 17.6 level seen in March.
                                                                            • Despite rising inflation, the U.S. consumer is showing resilience as retail sales increased 0.9% in April, slightly below the consensus expectation but well above the 0.5% increase seen in March.
                                                                              • Analysts were quick to note that while the report reflected positively on the resilience of the U.S. consumer, the reading is not adjusted for inflation and fuel for retail spending has increasingly relied on credit card debt in recent months.

                                                                                  The look forward

                                                                                  Upcoming economic data releases

                                                                                  • Chicago Fed National Activity Index - Monday
                                                                                  • S&P Global US Manufacturing/Services PMI - Tuesday
                                                                                  • New Home Sales - Tuesday
                                                                                  • FOMC Meeting Minutes - Wednesday
                                                                                  • Durable Goods Orders - Wednesday
                                                                                  • First quarter GDP (second estimate) - Thursday
                                                                                  • Jobless Claims - Thursday
                                                                                  • Wholesale Inventories - Friday
                                                                                  • Personal Spending - Friday
                                                                                  • University of Michigan Consumer Sentiment Index - Friday

                                                                                                                        Upcoming Federal Reserve speakers

                                                                                                                        • Bostic, George - Monday
                                                                                                                        • Powell - Tuesday
                                                                                                                        • Brainard - 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

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