Market Remains Resistant to Higher Funds Rate Projections

  • Treasury yields and stock futures are a bit higher this morning as the market continues to digest the latest Fed speak. The 10yr is yielding 3.79% up from the 3.67% low yield on Wednesday The 2yr is currently yielding 4.48%, up from the 4.29% low from last Thursday’s post-CPI rally.


  • Much of the upward shift in yields came after St. Louis Fed President James Bullard outlined his current expectations for the terminal fed funds rate by employing an old friend the Taylor Rule. His dovish scenario has the fed funds rate climbing to 5% while the more hawkish, or some would say reasonable, scenario has the funds rate peaking at 7%. That contributed to the selling in Treasury market but the action was rather muted on the longer end with investors still skeptical of those higher rate projections.


  • It should be noted too that the Taylor Rule, which uses inputs for inflation (core PCE), the so-called neutral real rate (net rate above inflation), and the unemployment rate to estimate an appropriate fed funds rate, has not been used to set policy but is just one data point that policy makers look at when setting rates. We’ll point out too that when the funds rate was at the zero lower bound of 0% – 0.25% the Taylor Rule would often be calling for a rate in the 3% to 4% range. So, it seems the market is aware that the model is just one view of where the funds rate should go and not the end all be all for monetary policy.


  • That said, the higher rate projections did have some impact on both Treasury yields and fed funds futures with that market now calling for a terminal rate just over 5% vs. just under 5% before Bullard’s latest comments. And with the short-end of the Treasury curve repricing higher more than the long-end the 2yr-10yr inversion reached a new cycle low of -71bps and it currently sits at -70bps this morning. That’s the deepest inversion since 1982, (see graph below), so the market sees a coming recession.


  • Also, Boston Fed President Susan Collins is out this morning with comments that largely follow the hawkish line of more work to be done and higher for longer. She did add that she feels a soft landing can be had without extensive damage to the labor market. As alluded to above, the market is not so sure that will happen. Treasuries haven’t moved too much on her headlines.


  • The last bit of economic releases this week comes later this morning with October existing home sales with another slowdown in activity expected as the recession in the housing market continues. While mortgage rates have dipped from a high of 7.35% on November 3 to 6.87% currently it will be interesting to see if that modest dip does anything for housing activity in November. It’s likely that it will but only at the margin.


  • If you missed our webinar on Tuesday, “Preparing your Balance Sheet for 2023” you can find a recording of it here. It’s a 50-minute presentation on the economy, asset liability issues, and product recommendations. We hope you find it useful.


2yr – 10yr Inversion Reaches 40-Year Low


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.27 5.09 5.03 5.02 5.11 5.57
0.50 5.25 5.06 4.97 4.91 4.96 5.46
1.00 5.25 5.03 4.94 4.87 4.87 5.33
2.00 5.01 4.88 4.79 4.76 NA
3.00 4.74 4.69 NA
4.00 4.65 NA
5.00 4.61 NA
10.00 NA

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Published: 11/18/22 Author: Thomas R. Fitzgerald