Is the end of forbearance another hike?
March 23, 2022
–Powell speaks today at a panel on Emerging Challenges for CBs in a Digital World, 8 am.
–Yields continued to rise to new highs with tens +6.5 bps to 2.373%, and twos up just 3 bps to 2.15%. One interesting note from yesterday’s action is that the curve steepened slightly on the move. On the eurodollar curve the first five year packs: whites, -1.25, reds -0.875, greens -4.625, blues -6.0 and golds -6.50. The eurodollar (and SOFR) curve is still inverted from EDM’23 (price 9702.5) forward, but slightly less so. June’23 SOFR is also the lowest contract on that strip (tied with SFRU3) at a price of 9728.5 or 2.715%. That forward funding rate is higher than every treasury yield except for the peak, which is the 20 yr, yielding 2.72% late in the day.
–New high in the front one-year euro$ calendar spread EDM2/EDM3 at 142 bps, up one on the day and signaling approximately six 25 bp hikes over that time frame.
–In the world of debt, I hadn’t considered student loans as a particularly large slice, but there’s a NY Fed piece of research that expects borrowers to have trouble making payments as forbearance ends. Link at bottom. To put it into context, the Fed’s last Z.1 report showed outstanding Consumer Credit for Q4 2021 at $4.434 TR. The NY Fed paper says that direct student loan debt outstanding (to the federal gov’t) is $1.3 TR, and that essentially none of that has been repaid, by 37 million borrowers, since forbearance started in 2020. So that amount is over 1/4 of total HH debt. The paper says that many of these borrowers will likely have trouble making payments once forbearance ends. My first thought was that in an extremely tight labor mkt with wages showing strong increases, how could that be true? My second thought is that many expect that $1.3 TR to be shifted from the column of outstanding Consumer (household debt) to the Federal Gov’t debt column as loans are forgiven. In any case, an end to forbearance would be another restraining headwind facing the economy as rates increase and energy prices rise.
