December. US Interest Rates. Chartbook

Transcription

1 December 2016 US Interest Rates Chartbook

2 Takeaways The FOMC December statement has revealed a unanimous vote for a 2nd Fed funds rate increase, while economic projections reinforced the Fed s stance to stay true to its data-dependent course and to adjust the Fed funds rate trajectory accordingly if inflation expectations rise faster than anticipated The median expectation of the FOMC policy firming path has shifted from two to three rate increases in Fed funds futures are pricing in two rate hikes in However, the implied probability for another rate increase at the January/February meeting is low at 12% Year-end long-term yields have normalized at rates that have not been this high since September-October The current uptick in rates has been contained by subdued volatility, a correction in inflation expectations to 2%, and a return to positive territory for long-term and mid-term duration-risk compression We continue to expect a moderate increase in long-term yields, supported by soft risk-on sentiment and higher expectations for growth and inflation. The baseline is for higher long-term rates and for a relatively flatter yield curve, while overall long-term yields risks to the baseline projections are biased towards the upside 2

3 Unconventional monetary policy Federal Funds Rate and 10-Year Treasury Note (%) First MBS Purchase QE2 "Operation Twist" QE3 End of QE3 Taper Tantrum Second Rate Hike First Rate Hike Year Treasury Yield Federal Funds Rate Source: BBVA Research, Federal Reserve Board and Haver Analytics 3

4 Third rate hike is priced in for 2Q17 Fed Funds Futures Implied Probabilities, Third 25bp Hike (%) /01/16 12/22/16 12/29/16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Source: BBVA Research and Bloomberg 4

5 Fourth rate hike is priced in for 3Q17 Fed Funds Futures Implied Probabilities, Fourth 25bp Hike (%) /1/ /22/ /29/2016 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Source: BBVA Research and Bloomberg 5

6 Fed funds futures curve Fed Funds Futures Most Recent, 1 Week Prior, 1 Month Prior, 3 Months Prior (%) Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-1 9/29/ /1/ /22/ /29/2016 Source: BBVA Research and Bloomberg 6

7 FOMC policy firming trajectory median revised upwards by 25 basis points in both 2017 and 2018 Projected Pace of Policy Firming (%, end of period) Long-Run FOMC Mean, Dec. 14, 2016 (±) 2 Standard Deviation Band, Dec. 14, 2016 FOMC Mean, Sep. 21, 2016 (±) 2 Standard Deviation Band, Sep. 21, 2016 Dealers Survey Median, Oct. 24, 2016 Source: BBVA Research and Federal Reserve Board 7

8 Federal Funds Rate (Upper Bound, %, EOP) BBVA forecast of the pace of Fed funds firming remains unchanged 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 Risk Downside Risk FOMC Mean (Sep. 2016) FOMC Median (Sep. 2016) Source: BBVA Research, Federal Reserve Board and Haver Analytics 8

9 Baseline forecasts of Treasury Bill yield 3-Month to 12-Month Rates (%) M 6M 12M Source: BBVA Research, Federal Reserve Board and Haver Analytics 9

10 10-Year U.S. Treasury Note Volatility (Daily Index) Long-term yield volatility has normalized below historic mean Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Index Mean since 2003 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 10

11 Long-term yield volatility trading is contained 10-Year U.S. Treasury Note Volatility (Daily Index) FOMC 1st Rate Hike December Spread High = 47 FOMC 2nd Rate Hike December Spread High = 7 0 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 High-Low Price Spread Source: BBVA Research, Federal Reserve Board and Haver Analytics 11

12 Soft upward pressure on term premium maintained 10-Year U.S. Treasury Term Premium & Market Inflation Expectations (Weekly, %) Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-1 10-Year U.S. Treasury Yield Average Expected Future Short Rates Implied 10-Year Spot Inflation Rate Ex-Ante Term Premium Fuente: BBVA Research and Federal Reserve Board 12

13 Duration-Risk Compression (Daily, %) Mid-term duration-risk compression has normalized in the vicinity of 18 basis points Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 5-Year to 3-Year Term Premium Spread 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

14 Duration-Risk Compression (Daily, %) Long-term duration-risk compression has normalized in the vicinity of 10 basis points Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul Year to 5-Year Term Premium Spread 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 14

15 10-year treasury yield forecasts 10-Year U.S. Treasury Yield (%) Historic Baseline Downside Risk Upside Risk NABE* (EOP, Dec 4) SPF** (EOP, Nov 14) CBO*** (Yr. Avg, Dec 1) Blue Chip**** (Jul 19) * National Association for Business Economics (NABE) Outlook median forecast compiled from a panel of NABE members. Last release date Dec 4, 2016 ** Survey of Professional Forecasters (SPF) conducted by Federal Reserve Bank of Philadelphia. Last release date November 14, 2016 *** Congressional Budget Office (CBO). Last release date Dec 1, 2016 ****The Blue Chip Consensus is the average of about 50 private forecasts. Last release date July 19, 2016 Source: BBVA Research, NABE, FRB Philadelphia, Congressional Budget Office, and Haver Analytics 15

16 Yield curve slope forecasts Treasury Yield Curve Slope (%, 10Y-2Y) Historic Baseline Downside Risk Upside Risk Source: BBVA Research, Federal Reserve Board and Haver Analytics 16

17 Yield curve forecasts Treasury Yield Curve Baseline Forecast (%, end of period) Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y 10-Year Average Source: BBVA Research, Federal Reserve Board and Haver Analytics 17

18 Treasury yield curve baseline forecasts U.S. Treasury Yield Curve (%) Y 3Y 5Y 10Y 30Y Source: BBVA Research, Federal Reserve Board and Haver Analytics 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

19 Swap curve baseline forecasts U.S. Swap Rates (%) Y 3Y 5Y 10Y 30Y Source: BBVA Research, Federal Reserve Board and Haver Analytics 19

20 LIBOR curve baseline forecasts U.S. LIBOR Rates (%) M 3M 6M 12M Source: BBVA Research, Federal Reserve Board and Haver Analytics 20

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.