u.s. interest rates chartbook · 2018-12-20 · u.s. interest rate chartbook │ february 2018 fed...

U.S. Interest Rates Chartbook

February 2018

U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018

Takeaways The FOMC March meeting will be Powell’s first as Chair. The

January minutes confirm that the Committee views the tax cuts

with optimism and developments abroad as an additional tailwind,

expecting the economy to run above potential for the medium-run.

Markets have interpreted Chairman Powell’s stance at the two-

day Congressional testimony as hawkish.

“We’ve seen continuing strength in the labor market.

We’ve seen some data that will, in my case, add some

confidence to my view that inflation is moving up to target.

We’ve also seen continued strength around the globe, and

we’ve seen fiscal policy become more stimulative.”

Fed funds futures are pricing in three rate increases for 2018. A

March rate increase is fully priced in and the implied probability

for a subsequent hike in June is at 98%.

An increase in long-term yields is supported by a soft but

sustained increase in Inflation expectations and moderate upward

pressures on term premium. However, term-premium remains

negative with near zero long-term duration-risk compression.

Given that the recent budget deal is expected to result in higher

economic growth and inflation, we revised upward our interest

rates forecasts. We now expect the Fed to raise rates four times –

25 basis point each, in 2018.

The baseline remains for a gradual increase in long-term yields

stabilizing at a higher rate over the forecast horizon due to higher

growth, adjustment to higher inflation expectations, and higher

term premium.


Unconventional monetary policy

3 Source: BBVA Research, Federal Reserve Board and Haver Analytics

FEDERAL FUNDS RATE AND THE 10-YEAR TREASURY NOTE

(%)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

08 09 10 11 12 13 14 15 16 17 18

10-Year Treasury Yield Federal Funds Rate

First MBS Purchase QE2

"Operation Twist"

QE3

Taper

Tantrum 1st

Rate

Hike

Start QE3 Taper 3rd

Rate

Hike

2nd

Rate

Hike

4th

Rate

Hike

5th

Rate

Hike


Dealers’ expectations for the long-run fed funds rate remain in

line with the median FOMC projection of 2.75%

4 Source: BBVA Research, Federal Reserve Bank of New York and Federal Reserve Board

PROJECTED PACE OF POLICY FIRMING

(%)

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

Dealers Survey Median, Jan. 22, 2018 (±) 25th Percentile FOMC Median, Dec. 13, 2017 (EOP)

Survey of Primary Dealers is formulated by the Trading Desk at the Federal Reserve Bank of New York. Last received date December 4, 2017


Fed funds futures are aligned with the FOMC 2018 trajectory

5 Source: BBVA Research and Bloomberg

FED FUNDS FUTURES – MOST RECENT, 1 WEEK PRIOR, 1 MONTH PRIOR, 3 MONTHS PRIOR

(%)

1.000

1.125

1.250

1.375

1.500

1.625

1.750

1.875

2.000

2.125

2.250

2.375

2.500

2.625

2.750

Feb-18 May-18 Aug-18 Nov-18 Feb-19 May-19 Aug-19 Nov-19 Feb-20 May-20 Aug-20 Nov-20

11/22/2017 1/31/2018 2/21/2018 2/28/2018


Fully priced in March rate hike and 98% probability of a seventh

rate increase in June


FED FUNDS FUTURES IMPLIED PROBABILITIES, SEVENTH 25BP HIKE

(%)

-

10

20

30

40

50

60

70

80

90

100

01/31/18 02/21/18 02/28/18

May-18 Jun-18 Jul-18 Aug-18 Sep-18


Fed funds firming pace forecast


FEDERAL FUNDS RATE

(%, Upper Bound, End of Period)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20

Actual Baseline Upside Downside


Baseline forecasts of treasury bill yield


3-MONTH TO 12-MONTH RATES

(%)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

3M 6M 12M


3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18

Index Mean since 2003

Long-term yield volatility remains low relative to historic mean

9 Source: BBVA Research, Chicago Board Options Exchange and Bloomberg

10-YEAR U.S. TREASURY NOTE VOLATILITY

(Daily index)

Index measures a constant 30-day expected volatility of 10-Year Treasury Note futures prices, and is calculated based on transparent pricing from the Chicago Board of Trade's actively

traded options on the Treasury Note futures


Modest upward pressure term premium coupled with a mild

increase in inflation expectations

10 Source: BBVA Research, Federal Reserve Board and Federal Reserve Bank of New York

10-YEAR U.S. TREASURY TERM PREMIUM & MARKET INFLATION EXPECTATIONS

(Weekly, %)

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

10-Year U.S. Treasury Yield Average Expected Future Short Rates

Implied 10-Year Spot Inflation Rate Ex-Ante Term Premium


Mid-term duration-risk compression increases to 3 basis points

11

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.

DURATION-RISK COMPRESSION

(Daily, %)

Source: BBVA Research, Federal Reserve Bank of New York and Haver Analytics

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

5-Year to 3-Year Term Premium Spread Historic Mean since 1971


-0.2

0.0

0.2

0.4

0.6

0.8

1.0

10-Year to 5-Year Term Premium Spread Historic Mean since 1971

Long-term duration-risk compression stabilizes in negative

territory

12

Calculated as the difference between 10-Year and 5-Year term premium reported by the New York Fed ACM (Adrian, Crump, and Moench) five-factor, no-arbitrage term structure

model incorporating pricing factors.

DURATION-RISK COMPRESSION

(Daily, %)

Source: BBVA Research, Federal Reserve Bank of New York and Haver Analytics


Futures discount a 12 basis point rise in 10-year Treasury

yields over the next 3 quarters


10-YEAR U.S. TREASURY YIELD FUTURES – MOST RECENT, 1 WEEK PRIOR, 4 WEEKS PRIOR

(%)

3.375

3.400

3.425

3.450

3.475

3.500

3.525

3.550

3.575

3.600

3.625

3.650

3.675

3.700

3.725

Mar-18 Jun-18 Sep-18

1/31/2018 2/21/2018 2/28/2018


10-year Treasury yield forecasts

14

* National Association for Business Economics (NABE) Outlook median forecast compiled from a panel of NABE members. Last release date December 3, 2017

** Survey of Professional Forecasters (SPF) conducted by Federal Reserve Bank of Philadelphia. Last release date February 9, 2018

*** Administration: 2018 Budget. Last release date February 12, 2018

^ Economic Forecasting Survey. The Wall Street Journal surveys a group of more than 60 economists on a monthly basis. Last release date February 1, 2018

10-YEAR U.S. TREASURY YIELD

(%)

Source: BBVA Research, NABE, FRB Philadelphia, FRB New York, CBO, WSJ and Haver Analytics

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

Historic Baseline Downside Risk

Upside Risk NABE* (EOP, Dec. 3) SPF** (EOP, Feb. 9)

Administration^ (Yr.Avg, Feb. 12) WSJ EFS^ (EOP, Feb. 1)


Yield curve slope forecasts


TREASURY YIELD CURVE SLOPE

(%, 10Y-2Y)

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

Historic Baseline Downside Risk Upside Risk


Yield curve forecasts

16

BBVA Research baseline forecast. 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.

TREASURY YIELD CURVE BASELINE FORECAST

(%, End of Period)

Source: BBVA Research, Federal Reserve Board and Haver Analytics

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

10-Year Average 2016 2017 2018(f) 2019(f) 2020(f)


Treasury yield curve baseline forecasts


U.S. TREASURY YIELD CURVE

(%)

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.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

2Y 3Y 5Y 10Y 30Y


Swap curve baseline forecasts

18

U.S. SWAP RATES

(%)

Source: BBVA Research, Federal Reserve Board and Haver Analytics

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

2Y 3Y 5Y 10Y 30Y


LIBOR curve baseline forecasts


U.S. DOLLAR LIBOR RATES

(%)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

1M 3M 6M 12M


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.

DISCLAIMER

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