Chartbook - BBVA Research...U.S. Interest Rate Chartbook. August 2016 Federal Funds Rate and 10-Year Treasury Note (%) 3 Unconventional monetary policy Source: BBVA Research, Federal

Chartbook US Interest Rates

August

2016

BBVA Research USA, Houston, TX

U.S. Interest Rate Chartbook. August 2016

Takeaways Fedspeak takes on a hawkish stance putting pressure on the Fed funds futures market

to align with at least one Fed funds rate increase in the second half of 2016

“in light of the continued solid performance of the labor market and our outlook for economic activity and

inflation, I believe the case for an increase in the federal funds rate has strengthened in recent month.”

FRB Chair Yellen at the Jackson Hole Symposium, August 26, 2016

“The work of the central bank is never done, and I don’t think you can say ‘one and done’ and that’s

it….We can choose the pace, but we choose the pace on the basis of data that’s coming in.” FRB Vice

Chairman Fischer interview with Bloomberg Television, August 30, 2016

The Fed funds futures are priced at only one rate increase by the end of 2017. The

December rate hike implied probability at 76% puts upward pressure on the short-end of

the yield curve

Persistent downward pressure on long-term yields is unchanged as long-term duration-

risk compression remains below zero and term-premium is pushed further into negative

territory

We continue to expect limited increase in long-term yields in the long run due to global

risk-off sentiment, low inflation risk, moderate growth expectations, and the condensed

duration risk environment 2


Federal Funds Rate and 10-Year Treasury Note

(%)

3

Unconventional monetary policy

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

08 09 10 11 12 13 14 15 16

10-Year Treasury Yield

Federal Funds Rate

First MBS Purchase QE2

"Operation Twist"

QE3

Taper Tantrum

End of QE3

First Rate Hike


Fed Funds Futures Implied Probabilities, Second 25bp Hike

(%)

September rate hike probability at 32%;

December at 76%

Source: BBVA Research and Bloomberg 4

-

10

20

30

40

50

60

70

80

90

100

6/3/2016 7/18/2016 8/19/2016 9/2/2016

Sep-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17


Fed Funds Futures – Most Recent, 1 Week Prior, 1 Month Prior, 3 Months Prior

(%)

5

A flatter Fed funds futures curve

Source: BBVA Research and Bloomberg

0.125

0.250

0.375

0.500

0.625

0.750

0.875

1.000

Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18

6/3/2016 7/18/2016 8/19/2016 9/2/2016


Projected Pace of Policy Firming

(%)

6

Dealers expect a lower policy path than the FOMC firming path

Source: BBVA Research, Federal Reserve Bank of New York and Federal Reserve Board

0.250.500.751.001.251.501.752.002.252.502.753.003.253.50

Dealers Survey Median, July 18, 2016 (±) 25th Percentile

FOMC Mean, June 6, 2016 (EOP) FOMC Median, June 6, 2016 (EOP)


Federal Funds Rate

(Upper Bound, %)

7

BBVA forecast of the pace of Fed funds firming revised


-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

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 Downside Alt


3-Month to 12-Month Rates

(%)

8

Baseline forecasts of Treasury Bill yield


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

05 06 07 08 09 10 11 12 13 14 15 16 17 18

3M 6M 12M


10-Year U.S. Treasury Note Volatility

(Daily Index)

9

Long-term rates futures volatility normalizes below historic mean

Source: BBVA Research, Chicago Board Options Exchange and Bloomberg

Index measures a constant 30-day expected volatility of 10-Year Treasury Note futures prices, and is calculated based on transparent pricing from Chicago Board of Trade's

actively traded options on the Treasury Note futures.

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16

Index Mean since 2003


10-Year U.S. Treasury Yield Volatility

(MoM, %)

10

Long-term rate yield volatility is near historic mean


0.0

0.2

0.4

0.6

0.8

1.0

1.2

56 60 64 68 72 76 80 84 88 92 96 00 04 08 12 16

Volatility Mean


10-Year U.S. Treasury Term Premium & Market Inflation Expectations

(Weekly, %)

11

Downward pressure on term premium unchanged

Fuente: BBVA Research and Federal Reserve Board

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

10-Year U.S. Treasury Yield Average Expected Future Short RatesImplied 10-Year Spot Inflation Rate Ex-Ante Term Premium


Duration-Risk Compression

(Daily, %)

12

Long-term duration-risk compression remains in negative territory

Source: BBVA Research, Federal Reserve Bank of New York and Haver Analytics

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.

-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


Duration-Risk Compression

(Daily, %)

13

Mid-term duration-risk compression crosses over from near zero into negative territory

Source: BBVA Research, Federal Reserve Bank of New York and Haver Analytics

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.

-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


10-Year U.S. Treasury Yield Futures – Most Recent, 1 Week Prior, 1 Month Prior, 3 Months Prior (%)

14

Futures continue to discount at 17bp raise in 10YTN yields over the next 3 quarters

Source: BBVA Research and Bloomberg

2.125

2.250

2.375

2.500

2.625

2.750

Sep-16 Dec-16 Mar-17

6/3/16 8/5/16 8/26/16 9/2/16


10-Year U.S. Treasury Yield

(%)

15

10-year treasury yield forecasts

* National Association for Business Economics (NABE) Outlook median forecast compiled from a panel of NABE members. Last release date June 05, 2016

** Survey of Professional Forecasters (SPF) conducted by Federal Reserve Bank of Philadelphia. Last release date August 12, 2016

*** Congressional Budget Office (CBO). Last release date Aug 23, 2016

****The Blue Chip Consensus is the average of about 50 private forecasts. Last release date July 19, 2016

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

07 08 09 10 11 12 13 14 15 16 17 18 19 20

Historic Baseline Downside Downside Alt Upside

SPF** (EOP) NABE* (EOP) CBO*** (Yr.Avg) Blue Chip****

Source: BBVA Research, NABE, FRB Philadelphia,

Congressional Budget Office, and Haver Analytics


Treasury Yield Curve Slope

(10Y-2Y, %)

16

Yield curve slope forecasts


-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

Historic Baseline


Treasury Yield Curve Baseline Forecast

(Average, %)

17

Yield curve forecasts


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 2019


U.S. Treasury Yield Curve

(%)

18

Treasury yield curve baseline forecasts


0.0

1.0

2.0

3.0

4.0

5.0

6.0

05 06 07 08 09 10 11 12 13 14 15 16 17 18

2Y 3Y 5Y 10Y 30Y

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.


U.S. Swap Rates

(%)

19

Swap curve baseline forecasts


0.0

1.0

2.0

3.0

4.0

5.0

6.0

05 06 07 08 09 10 11 12 13 14 15 16 17 18

2Y 3Y 5Y 10Y 30Y


LIBOR

(Daily, %)

0.1

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1-Month LIBOR 3-Month LIBOR6-Month LIBOR 1-Year LIBOR

2Q09

20

3-month LIBOR surges to a level not seen since

2009

Structural changes to LIBOR and money

market fund rules that will come into effect

in October 14, 2016 have elevated 3-month

to 1-year LIBOR rates in August

Part of the upward pressure on LIBOR can

also be attributed to the signal from the

FOMC of a nearing Fed funds rate hike


U.S. LIBOR Rates

(%)

21

LIBOR curve baseline forecasts


0

1

2

3

4

5

6

05 06 07 08 09 10 11 12 13 14 15 16 17 18

1M 3M 6M 12M

DISCLAIMER This document was prepared by Banco Bilbao Vizcaya Argentaria’s (BBVA) BBVA Research U.S. on

behalf of itself and its affiliated companies (each BBVA Group Company) for distribution in the

United States and the rest of the world and is provided for information purposes only. Within the US,

BBVA operates primarily through its subsidiary Compass Bank. The information, opinions, estimates

and forecasts contained herein refer to the specific date and are subject to changes without notice

due to market fluctuations. The information, opinions, estimates and forecasts contained in this

document have been gathered or obtained from public sources, believed to be correct by the

Company concerning their accuracy, completeness, and/or correctness. This document is not an

offer to sell or a solicitation to acquire or dispose of an interest in securities.

Documents

Chartbook - BBVA Research...U.S. Interest Rate Chartbook. August 2016 Federal Funds Rate and 10-Year Treasury Note (%) 3 Unconventional monetary policy Source: BBVA Research, Federal