August
2016
US Interest Rates
Chartbook
U.S. Interest Rate Chartbook. August 2016
Takeaways Fedspeak takes on a hawkish stance putting pressure on the Fed funds futures market to align with at least one Fed funds rate increase in the second half of 2016 “in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent month.” FRB Chair Yellen at the Jackson Hole Symposium, August 26, 2016 “The work of the central bank is never done, and I don’t think you can say ‘one and done’ and that’s it….We can choose the pace, but we choose the pace on the basis of data that’s coming in.” FRB Vice Chairman Fischer interview with Bloomberg Television, August 30, 2016
The Fed funds futures are priced at only one rate increase by the end of 2017. The December rate hike implied probability at 76% puts upward pressure on the short-end of the yield curve Persistent downward pressure on long-term yields is unchanged as long-term durationrisk compression remains below zero and term-premium is pushed further into negative territory We continue to expect limited increase in long-term yields in the long run due to global risk-off sentiment, low inflation risk, moderate growth expectations, and the condensed duration risk environment 2
U.S. Interest Rate Chartbook. August 2016
Unconventional monetary policy Federal Funds Rate and 10-Year Treasury Note (%) 5.0
QE2
First MBS Purchase
4.5
QE3
End of QE3
"Operation Twist"
4.0
First Rate Hike
Taper Tantrum
3.5 3.0 2.5 2.0 1.5 1.0
10-Year Treasury Yield
0.5
Federal Funds Rate
0.0 08
09
10
11
Source: BBVA Research, Federal Reserve Board and Haver Analytics
12
13
14
15
16 3
U.S. Interest Rate Chartbook. August 2016
September rate hike probability at 32%; December at 76% Fed Funds Futures Implied Probabilities, Second 25bp Hike (%) 100 90 80 70
60 50 40 30 20 10 6/3/2016 Sep-16
Source: BBVA Research and Bloomberg
7/18/2016 Nov-16
Dec-16
8/19/2016 Jan-17
9/2/2016 Feb-17
Mar-17 4
U.S. Interest Rate Chartbook. August 2016
A flatter Fed funds futures curve Fed Funds Futures – Most Recent, 1 Week Prior, 1 Month Prior, 3 Months Prior (%) 1.000 0.875 0.750 0.625 0.500 0.375 0.250
0.125 Sep-16
Dec-16 6/3/2016
Source: BBVA Research and Bloomberg
Mar-17
Jun-17 7/18/2016
Sep-17
Dec-17
Mar-18
8/19/2016
Jun-18
Sep-18
Dec-18
9/2/2016 5
U.S. Interest Rate Chartbook. August 2016
Dealers expect a lower policy path than the FOMC firming path Projected Pace of Policy Firming (%) 3.50 3.25 3.00 2.75 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25
Dealers Survey Median, July 18, 2016 FOMC Mean, June 6, 2016 (EOP) Source: BBVA Research, Federal Reserve Bank of New York and Federal Reserve Board
(±) 25th Percentile FOMC Median, June 6, 2016 (EOP) 6
U.S. Interest Rate Chartbook. August 2016
BBVA forecast of the pace of Fed funds firming revised Federal Funds Rate (Upper Bound, %) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 Jan-15
Jul-15 Actual
Jan-16
Jul-16
Jan-17
Baseline
Source: BBVA Research, Federal Reserve Board and Haver Analytics
Jul-17
Jan-18
Upside
Jul-18
Jan-19
Downside
Jul-19
Jan-20
Jul-20
Downside Alt 7
U.S. Interest Rate Chartbook. August 2016
Baseline forecasts of Treasury Bill yield 3-Month to 12-Month Rates (%) 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
05
06
07
08
09
10
11 3M
Source: BBVA Research, Federal Reserve Board and Haver Analytics
12 6M
13
14
15
16
17
18
12M 8
U.S. Interest Rate Chartbook. August 2016
Long-term rates futures volatility normalizes below historic mean 10-Year U.S. Treasury Note Volatility (Daily Index) 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 Jan-14
Apr-14
Jul-14
Oct-14 Index
Jan-15
Apr-15
Jul-15
Oct-15 Jan-16 Mean since 2003
Apr-16
Jul-16
Index measures a constant 30-day expected volatility of 10-Year Treasury Note futures prices, and is calculated based on transparent pricing from Chicago Board of Trade's actively traded options on the Treasury Note futures. Source: BBVA Research, Chicago Board Options Exchange and Bloomberg
9
U.S. Interest Rate Chartbook. August 2016
Long-term rate yield volatility is near historic mean 10-Year U.S. Treasury Yield Volatility (MoM, %) 1.2 1.0 0.8 0.6 0.4 0.2 0.0 56
60
64
68
72 76 Volatility
Source: BBVA Research, Federal Reserve Board and Haver Analytics
80
84
88
92
96
00 Mean
04
08
12
16
10
U.S. Interest Rate Chartbook. August 2016
Downward pressure on term premium unchanged 10-Year U.S. Treasury Term Premium & Market Inflation Expectations (Weekly, %) 3.5
3.0 2.5 2.0 1.5 1.0 0.5 0.0
-0.5 -1.0 Jan-14
Jul-14 Jan-15 10-Year U.S. Treasury Yield Implied 10-Year Spot Inflation Rate
Fuente: BBVA Research and Federal Reserve Board
Jul-15
Jan-16 Jul-16 Average Expected Future Short Rates Ex-Ante Term Premium 11
U.S. Interest Rate Chartbook. August 2016
Long-term duration-risk compression remains in negative territory Duration-Risk Compression (Daily, %) 1.0 0.8 0.6
0.4 0.2 0.0 -0.2 Jan-14
Jul-14
Jan-15
10-Year to 5-Year Term Premium Spread
Jul-15
Jan-16
Jul-16
Historic Mean since 1971
Calculated as the difference between 5-Year and 3-Year term premium reported by the New York Fed ACM (Adrian, Crump, and Moench) five-factor, no-arbitrage term structure model incorporating pricing factors. Source: BBVA Research, Federal Reserve Bank of New York and Haver Analytics
12
U.S. Interest Rate Chartbook. August 2016
Mid-term duration-risk compression crosses over from near zero into negative territory Duration-Risk Compression (Daily, %) 0.6 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 Jan-14
Jul-14 Jan-15 5-Year to 3-Year Term Premium Spread
Jul-15
Jan-16 Jul-16 Historic Mean since 1971
Calculated as the difference between 5-Year and 3-Year term premium reported by the New York Fed ACM (Adrian, Crump, and Moench) five-factor, no-arbitrage term structure model incorporating pricing factors. Source: BBVA Research, Federal Reserve Bank of New York and Haver Analytics
13
U.S. Interest Rate Chartbook. August 2016
Futures continue to discount at 17bp raise in 10YTN yields over the next 3 quarters 10-Year U.S. Treasury Yield Futures – Most Recent, 1 Week Prior, 1 Month Prior, 3 Months Prior (%) 2.750 2.625 2.500 2.375 2.250 2.125 Sep-16 6/3/16 Source: BBVA Research and Bloomberg
Dec-16 8/5/16
Mar-17 8/26/16
9/2/16 14
U.S. Interest Rate Chartbook. August 2016
10-year treasury yield forecasts 10-Year U.S. Treasury Yield (%) 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 07
08
09
10
11
12
13
14
15
16
17
Historic
Baseline
Downside
Downside Alt
SPF** (EOP)
NABE* (EOP)
CBO*** (Yr.Avg)
Blue Chip****
18
19
20
Upside
* National Association for Business Economics (NABE) Outlook median forecast compiled from a panel of NABE members. Last release date June 05, 2016 ** Survey of Professional Forecasters (SPF) conducted by Federal Reserve Bank of Philadelphia. Last release date August 12, 2016 *** Congressional Budget Office (CBO). Last release date Aug 23, 2016 Source: BBVA Research, NABE, FRB Philadelphia, ****The Blue Chip Consensus is the average of about 50 private forecasts. Last release date July 19, 2016 Congressional Budget Office, and Haver Analytics
15
U.S. Interest Rate Chartbook. August 2016
Yield curve slope forecasts Treasury Yield Curve Slope (10Y-2Y, %) 3.0 2.5 2.0 1.5 1.0
0.5 0.0 -0.5 07
08
09
10
11 Historic
Source: BBVA Research, Federal Reserve Board and Haver Analytics
12
13
14
15
16 Baseline
17
18
19
16
U.S. Interest Rate Chartbook. August 2016
Yield curve forecasts Treasury Yield Curve Baseline Forecast (Average, %) 4.5 4.0
3.5 3.0 2.5
2.0 1.5 1.0
0.5 0.0 1Y 2Y 10-Year Average
3Y
5Y 2016
Source: BBVA Research, Federal Reserve Board and Haver Analytics
7Y 2017
10Y 2018
20Y
30Y 2019 17
U.S. Interest Rate Chartbook. August 2016
Treasury yield curve baseline forecasts U.S. Treasury Yield Curve (%) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 05
06
07 2Y
08
09 3Y
10
Source: BBVA Research, Federal Reserve Board and Haver Analytics
11
12 5Y
13
14 10Y
15
16
17 30Y
18
Treasury yield curve is estimated with a three-factor no-arbitrage model linked to macroeconomic factors measuring growth, inflation and monetary policy. Estimates are based on BBVA Research baseline forecast for GDP growth, inflation and Fed funds rate.
18
U.S. Interest Rate Chartbook. August 2016
Swap curve baseline forecasts U.S. Swap Rates (%) 6.0 5.0 4.0 3.0 2.0 1.0
0.0 05
06
07 2Y
08
09
10
3Y
Source: BBVA Research, Federal Reserve Board and Haver Analytics
11
12 5Y
13
14 10Y
15
16
17
18
30Y 19
U.S. Interest Rate Chartbook. August 2016
3-month LIBOR surges to a level not seen since 2009 LIBOR (Daily, %) 1.7
Structural changes to LIBOR and money market fund rules that will come into effect in October 14, 2016 have elevated 3-month to 1-year LIBOR rates in August
1.5 1.3 1.1 2Q09
0.9 0.7
Part of the upward pressure on LIBOR can also be attributed to the signal from the FOMC of a nearing Fed funds rate hike
0.5 0.3 0.1
1-Month LIBOR 6-Month LIBOR
3-Month LIBOR 1-Year LIBOR
20
U.S. Interest Rate Chartbook. August 2016
LIBOR curve baseline forecasts U.S. LIBOR Rates (%) 6 5 4
3 2 1 0 05
06
07 1M
08
09
10 3M
Source: BBVA Research, Federal Reserve Board and Haver Analytics
11
12
13 6M
14
15
16
17
18
12M 21
DISCLAIMER This document was prepared by Banco Bilbao Vizcaya Argentaria’s (BBVA) BBVA Research U.S. on behalf of itself and its affiliated companies (each BBVA Group Company) for distribution in the United States and the rest of the world and is provided for information purposes only. Within the US, BBVA operates primarily through its subsidiary Compass Bank. The information, opinions, estimates and forecasts contained herein refer to the specific date and are subject to changes without notice due to market fluctuations. The information, opinions, estimates and forecasts contained in this document have been gathered or obtained from public sources, believed to be correct by the Company concerning their accuracy, completeness, and/or correctness. This document is not an offer to sell or a solicitation to acquire or dispose of an interest in securities.
