May
2016
US Interest Rates
Chartbook
U.S. Interest Rate Chartbook. May 2016
Takeaways The Fed’s April meeting minutes and the May Fedspeak lineup of Federal Reserve Board and Regional Bank Presidents have embraced clarity, signaling their inclination towards a summer rate hike “Depending on the incoming data and the evolving risks, another rate increase may be appropriate fairly soon” FRB Governor Powell, May 26, 2016 “It’s appropriate -- and I’ve said this in the past -- for the Fed to gradually and cautiously increase our overnight interest rate over time. … Probably in the coming months such a move would be appropriate.” FRB Chair Yellen, May 27, 2016
A higher likelihood now exists for a summer rate hike prompted by Fedspeak downplay of possible headwinds from China and a “Brexit” vote, as the Fed continues to highlight positive economic data on growth and employment. The Fed funds futures market has adjusted to hawkish Fed stance increasing the odds for June hike to 34% and July’s to 72% The yield curve has flatten under upward pressure from Fed policy expectations on the short end of the curve and downward pressure on the long end from the prolonged period of negative term premium and duration risk compression Limited increase in long-term yields in the long-run. The downward bias in mid-term to longterm baseline yield forecasts toward a “prolonged flight to safety” scenario remains 2
U.S. Interest Rate Chartbook. May 2016
Unconventional monetary policy Federal Funds Rate and 10-Year Treasury Note (%) 5.0
First MBS Purchase
QE2
4.5
End of QE3
QE3 "Operation Twist"
4.0
Taper Tantrum
3.5
First Rate Hike
3.0 2.5 2.0 1.5 1.0
10-Year Treasury Yield Federal Funds Rate
0.5
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. May 2016
A soft steepening of Fed funds futures curve Fed Funds Futures – Most Recent, 1 Week Prior, 1 Month Prior, 3 Months Prior (%) 2.00 1.75 1.50 1.25
1.00 0.75 0.50
0.25 0.00 May-16
Nov-16 2/26/2016
Source: BBVA Research and Bloomberg
May-17 4/29/2016
Nov-17 5/20/2016
May-18
Nov-18
5/27/2016 4
U.S. Interest Rate Chartbook. May 2016
June rate hike probability at 34%. July rate hike probability at 72% Fed Funds Futures Implied Probabilities, Second 25bp (%) 100 90 80 70 60 50
40 30 20 10 2/26/2016 Jun-16
Source: BBVA Research and Bloomberg
4/29/2016 Jul-16
5/20/2016 Sep-16
Nov-16
5/27/2016 Dec-16
U.S. Interest Rate Chartbook. May 2016
Dealers expect June rate hike followed by a slower pace of firming than the FOMC March projection 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, Apr. 18, 2016 FOMC Mean, Mar. 16, 2016 (EOP) Source: BBVA Research, Federal Reserve Bank of New York and Federal Reserve Board
(±) 25th Percentile FOMC Median, Mar. 16, 2016 (EOP) 6
U.S. Interest Rate Chartbook. May 2016
BBVA forecast of the pace of Fed funds firming remains unchanged Federal Funds Rate (Upper Bound, %) 6 5 4 3 2 1 0 Jan-15
Jul-15
Jan-16 Actual
Jul-16
Jan-17
Jul-17
Baseline
Source: BBVA Research, Federal Reserve Board and Haver Analytics
Jan-18
Jul-18
Jan-19
Upside
Jul-19
Jan-20
Jul-20
Downside 7
U.S. Interest Rate Chartbook. May 2016
Treasury bill yields baseline forecasts 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. May 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 Mean since 2003
Jan-16
Apr-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. May 2016
Long-term rates 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. May 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 Average Expected Future Short Rates Ex-Ante Term Premium 11
U.S. Interest Rate Chartbook. May 2016
Long-term duration-risk compression near zero 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 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. May 2016
Mid-term duration-risk compression dropped farther below historic mean Duration-Risk Compression (Daily, %) 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Jan-14
Jul-14
Jan-15
5-Year to 3-Year Term Premium Spread
Jul-15
Jan-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. May 2016
Futures discount at 4bp 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 (%) 2.825
2.700
2.575
2.450 Jun-16 2/26/16 Source: BBVA Research and Bloomberg
Sep-16 4/29/16
Dec-16 5/20/16
5/27/16 14
U.S. Interest Rate Chartbook. May 2016
Treasury yield curve scenarios Baseline
Prolonged Safe Haven Flows
Downside
Upside
GDP Growth
2.3%
2.3%
1.4%
2.9%
Unemployment
4.6%
4.9%
6.3%
4.2%
CPI Inflation
1.9%
1.9%
2.6%
FFR EOP
Tabla
1.1%
3.5%
3.5%
1.0%
5.0%
10-Year Treasury Yield EOP
4.6%
4.0%
2.6%
6.0%
Treasury Yield Curve Slope 10Y-2YEOP
0.9%
0.4%
1.3%
0.7%
Averages for 2016-2020
* Prolonged safe heaven flows scenario assumes baseline macro economic conditions but also encompasses intensified safe haven flow conditions such as prolonged global financial volatility and risk-off sentiment. Source: BBVA Research
15
U.S. Interest Rate Chartbook. May 2016
10-year treasury yield forecasts 10-Year U.S. Treasury Yield (%) 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 07 08 09 Historic Upside NABE* (EOP)
10
11
12 13 14 15 16 Baseline Prolonged Safe Haven Flows Administration*** (Yr.Avg)
17 18 19 Downside SPF** (EOP)
* National Association for Business Economics (NABE) Outlook median forecast compiled from a panel of NABE members. Last release date Mar 28, 2016 ** Survey of Professional Forecasters (SPF) conducted by Federal Reserve Bank of Philadelphia. Last release date Mary13, 2016 *** Administration: 2017 Budget. Last release date Feb. 10, 2016 Source: BBVA Research, NABE, FRB Philadelphia, Office of Management and Budget, and Haver Analytics
20
16
U.S. Interest Rate Chartbook. May 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 Historic
09
10 11 Baseline
12 13 Upside
Source: BBVA Research, Federal Reserve Board and Haver Analytics
14 15 Downside
16
17 18 19 20 Prolonged Safe Haven Flows
17
U.S. Interest Rate Chartbook. May 2016
2019 yield curve forecasts 2019 Treasury Yield Curve (EOP, %) 7.0 6.0 5.0
4.0 3.0 2.0 1.0 0.0 1Y 10-Year Average
2Y
3Y Baseline
Source: BBVA Research, Federal Reserve Board and Haver Analytics
5Y Upside
7Y Downside
10Y 30Y Prolonged Safe Haven Flows 18
U.S. Interest Rate Chartbook. May 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 Column1
07
08
09
10
Source: BBVA Research, Federal Reserve Board and Haver Analytics
11
12
13
14
15
16
17
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.
19
U.S. Interest Rate Chartbook. May 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 20
U.S. Interest Rate Chartbook. May 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
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