2yr yield, ED5 and Fed Funds
April 20, 2022
–Yields continue their ascent, with tens adding another 5.3 bps to 2.913%. The thirty year ended (at futures settlement) just shy of 3% at 2.989%, up 4 bps, and the ten year swap was also marked near 3%, at 2.973%. Volume was light. The weakest contract on the eurodollar strip was EDU’23 at down 15.5, settling 9651.5, but the lowest settle is still EDM23 at 9651.0, more on that below.
–The Fed’s preferred measure of inflation is Core PCE deflator. On March 31, that data point was released for February at 5.4%. In the Fed’s projections from March, the estimate for Core PCE was 4.1% for 2022 and 2.6% for 2023. I had a friend ask me to poll clients as to what they thought it would be in June 2023. (Thanks JC) His guess is over 5%. Mine is 4.5%. Respond to this e-mail if you care to, and I will aggregate.
–A couple of website blurbs are citing the possibility of positive real yields as a large risk for markets. While the ten year inflation-indexed note is nearly positive at -4 bps, yields across the board vs actual inflation are negative. According to St Louis Fed’s website, the BofA Hi-Yield effective yield is 6.4%, still well below the last CPI reading.
–The above chart shows the mid-target for Fed Funds in amber. The two year note yield is purple. In red is the 5th quarterly eurodollar contract, currently EDM’23, which, as noted above is the lowest contract on the strip at 9651.0 settle. The sixth contract, currently EDU23, settled 9651.5, so these two are essentially 3.5%, consistent with a FF target of 3.25%. Though not shown on the chart, this is the lowest price for the 5th quarterly since 2008. In 2018, the lowest settle for ED5 was 9671.5. By comparison, the high yield in the 2yr treasury was 2.96% in 2018, and yesterday, even at a new high for this move, it’s 2.58% or 38 bps lower! The high in the 5y yield in 2018 was 3.09%, now 2.89% or 20 bps away.
In 2018, the 2y made its high yield of 2.96% in November, with the FF target 2.0-2.25%. The final hike was in December 2018, raised to 2.25-2.5%. It had taken two years to hike a total of 200 bps. Currently, we’ve experienced just one hike of 25, with 50 bp moves priced for each of the next two meetings in May and June. The forecast embedded in EDM’23 is quite astounding.
