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.
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
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
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
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
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
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
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
Fully priced in March rate hike and 98% probability of a seventh
rate increase in June
6 Source: BBVA Research and Bloomberg
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
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
Fed funds firming pace forecast
7 Source: BBVA Research, Federal Reserve Board and Haver Analytics
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
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
Baseline forecasts of treasury bill yield
8 Source: BBVA Research, Federal Reserve Board and Haver Analytics
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
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
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
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
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
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
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
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
-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
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
Futures discount a 12 basis point rise in 10-year Treasury
yields over the next 3 quarters
13 Source: BBVA Research and Bloomberg
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
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 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)
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
Yield curve slope forecasts
15 Source: BBVA Research, Federal Reserve Board and Haver Analytics
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
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
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)
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
Treasury yield curve baseline forecasts
17 Source: BBVA Research, Federal Reserve Board and Haver Analytics
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
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
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
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
LIBOR curve baseline forecasts
19 Source: BBVA Research, Federal Reserve Board and Haver Analytics
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
U.S. INTEREST RATE CHARTBOOK │ FEBRUARY 2018
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