| Tuesday, October 31, 2017 | ||||||||
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MANAGING DIRECTOR: |
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US Treasury Market |
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| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 10/24/17 | 1.00 | 1.12 | 1.27 | 1.43 | 1.60 | 1.73 | 2.05 | 2.26 | 2.42 | 2.70 | 2.92 |
| 10/25/17 | 1.01 | 1.12 | 1.27 | 1.43 | 1.61 | 1.74 | 2.06 | 2.28 | 2.44 | 2.72 | 2.95 |
| 10/26/17 | .99 | 1.11 | 1.29 | 1.43 | 1.63 | 1.76 | 2.07 | 2.30 | 2.46 | 2.74 | 2.96 |
| 10/27/17 | .98 | 1.10 | 1.28 | 1.42 | 1.59 | 1.73 | 2.03 | 2.26 | 2.42 | 2.71 | 2.93 |
| 10/30/17 | .97 | 1.12 | 1.24 | 1.42 | 1.58 | 1.71 | 2.00 | 2.22 | 2.37 | 2.66 | 2.88 |
Source: U.S. Department of the Treasury, as of 10/30/17
Watch the Yield Curve…
Want to know where the Fed is headed? Watch the yield curve.
With 3rd quarter GDP increasing by 3.1% (in spite of the devastating Hurricanes this year), following a 3.00% increase in the 2nd quarter, the path appears to have been cleared for the Fed to continue to increase short term rates in December. And if the Administrations proposed tax plan can somehow get through a divided congress before year end, it will likely add even more fuel to the fire for GDP.
We have often cited the Velocity of Money graph in this space, with the caveat that without increasing Velocity there cannot be significantly increasing interest rates. It is fair to point out that we have not seen a corresponding increase in the Velocity of Money (last reported 6/2017). However, GDP is a product of Velocity and the Supply of Money. If the Supply of money is relatively stable, and GDP is increasing, then we believe an increase in the Velocity must be occurring, it simply may not be showing up in the quarterly data as of yet. Admittedly, 3.00% is not “rip-roaring” economic growth, not like the recoveries in the 80’s and 90’s, which often saw 4-8% growth spurts, but it is far better than the anemic 1.8%-2.00% growth experienced for the last several years.
So what does this mean? As the markets anticipate continued tightening of rates on the short end of the curve, the yield curve will tend to flatten. Don’t take your eye off of the ball. When the curve begins to roll over, it encourages the “timid” investor to become even more cautious. If you can get the same yield on a 2Y investment as that of a 5Y, the timid investor will prefer the 2Y maturity. The more forward thinking investor would rather lock that return in for a longer period of time, and therefore prefer the 5Y (or 10Y?).
This thinking applies to all areas of your balance sheet as well; Loans, Deposits, Advance Strategies, etc. Keep in mind, Loan demand tends to remain strong through the flattening cycle, but it is important to keep a focus on the entire balance sheet to ensure you do not miss out on the opportunities the market presents to you. If you subscribe to our PARs reporting, you receive the “Decision Matrix” we have created to guide you through these cycles. If not, call us so you can get signed up for this service.
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.
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