Thursday, July 27, 2017
MANAGING DIRECTOR: Scott Carrithers   PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Robert Brickson • Kevin Doyle • Lonnie Harris • Larry Russell •  Mark Tranckino • Robert Schuyler  Tom Toburen • Josh Kiefer • Nicole Burczyk • Kelley Frye • Natalie Regan • Aaron Stoffer

US Treasury Market
Date	1 mo	3 mo	6 mo	1 yr	2 yr	3 yr	5 yr	7 yr	10 yr	20 yr	30 yr
7/20/17	1.00	1.15	1.12	1.22	1.37	1.51	1.82	2.08	2.27	2.60	2.83
7/21/17	1.00	1.16	1.10	1.22	1.36	1.50	1.81	2.05	2.24	2.57	2.81
7/24/17	1.00	1.17	1.12	1.23	1.37	1.53	1.83	2.07	2.26	2.59	2.83
7/25/17	.96	1.18	1.15	1.24	1.40	1.56	1.90	2.15	2.33	2.67	2.91
7/26/17	1.02	1.13	1.14	1.23	1.36	1.50	1.83	2.09	2.29	2.65	2.89

Today’s Topic:  Curve Compression …?

The FOMC has raised the overnight target rate by 100 bps since first increasing the benchmark rate in December of 2015 (after seven years of zero to 25 bps.)  Since then, surprisingly, financial conditions have become easier, according to the Bloomberg Financial Conditions Index (see below). Not only are financial conditions easier now than before the tightening began, but the index is at its highest level since 2007. As such, policy makers are increasingly concerned financial distortions are developing.

Perhaps this partially explains their more hawkish desire to raise rates faster and farther than market projections. Official guidance from the FRB continues to project another 25 bps rate hike this year, followed by three (3) more rate hikes of 25 bps in 2018.  According to this official forecast, the overnight target rate will be 2.25% by year-end 2018. 

Given the guidance for further increases in the overnight rate, you’d think long Treasury yields would be climbing, but you’d be mistaken.  The yield from 10-year USTNs peaked at 2.62% on 3/15/17, falling 50 bps to 2.12% on 6/14/17.  Coincidently, the overnight target rate was bumped 25 bps on 3/15/17, and another 25 bps on 6/14/17.

As a result, the U.S. Treasury curve has continued to flatten.  Measuring the difference between 2-year and 10-year Treasuries, the curve has leveled-out from its all-time high of 281 bps on 3/31/10 to 95 bps today.

Apparently hedge funds and other large speculators expect more flattening ahead, as they recently increased their net short position in 2-year Treasury futures to an unprecedented 274,213 contracts, while boosting their net long position in 10-year Treasury futures to 282,329 contracts.  When combined, the net bet reflects an expectation of further compression in the yield curve.

This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

•Not FDIC Insured •No Bank Guarantee •May Lose Value