U.S. Interest Rates Chartbook - BBVA Research...U.S. INTEREST RATE CHARTBOOK MAY 2017 June Rate Hike Probability is at 98% 4 Source: BBVA Research and Bloomberg FED FUNDS FUTURES IMPLIED

U.S. INTEREST RATE CHARTBOOK │ MAY 2017

1

U.S. Interest Rates

Chartbook May 2017


Takeaways

FOMC minutes and Fedspeak have signaled FOMC

readiness to raise the Fed funds rate by another 25bp at its

next meeting in June. The Committee’s commitment to the

gradual reduction of its balance sheet “later this year” remains

unchanged and will likely be green lighted once the policy rate

extends midway towards the median of the FOMC projected

long-run rate of 3.00%

“With the federal funds rate projected to be in the range that is

midway to the Committee's projection of the long-run value of the

federal funds rate later this year, I would consider it reasonable to

assess that this threshold will have been attained before too long”

May 30, 2017, Governor Lael Brainard Speech

“I would view it as appropriate to continue to gradually raise rates. I

would also see it as appropriate to begin the process of reducing

the size of the balance sheet later this year”

June 1, 2017, Governor Jerome Powell Speech

The Fed funds futures market is aligned with the FOMC,

pricing in two more rate hikes in 2017 with a 98% implied

probability for the next rate increase in June, followed by a

rate increase in December

The yield curve flattens under newly resumed downward

pressure on long-term yields as inflation expectations and

term premium edge down

The baseline is for a gradual increase in long-term yields


Unconventional Monetary Policy

3 Source: BBVA Research, Federal Reserve Board and Haver Analytics

FEDERAL FUNDS RATE AND 10-YEAR TREASURE NOTE

(%)

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 17

10-Year Treasury Yield Federal Funds Rate

First MBS Purchase QE2

"Operation Twist"

QE3

Taper

Tantrum 1st

Rate Hike

End of QE3 3rd

Rate Hike

2nd

Rate Hike


June Rate Hike Probability is at 98%

4 Source: BBVA Research and Bloomberg

FED FUNDS FUTURES IMPLIED PROBABILITIES, FOURTH 25BP HIKE

(%)

-

10

20

30

40

50

60

70

80

90

100

2/22/2017 5/3/2017 5/24/2017 5/31/2017

Jun-17 Jul-17 Aug-17 Sep-17


Fifth Rate Hike is Priced in for 4Q17


FED FUNDS FUTURES IMPLIED PROBABILITIES, FIFTH 25BP HIKE

(%)

-

10

20

30

40

50

60

70

80

90

100

05/03/17 05/24/17 05/31/17

Sep-17 Oct-17 Nov-17 Dec-17


Fed Funds Futures Curve


FED FUNDS FUTURES – MOST RECENT, 1 WEEK PRIOR, 1 MONTH PRIOR, 3 MONTHS PRIOR

(%)

0.500

0.625

0.750

0.875

1.000

1.125

1.250

1.375

1.500

1.625

1.750

1.875

2.000

May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Feb-19 May-19 Aug-19 Nov-19

2/22/2017 5/3/2017 5/24/2017 5/31/2017


Dealers’ expectations match the FOMC policy firming path

for the end of 2017 to 2018

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

PROJECTED PACE OF POLICY FIRMING

(%)

0.250.500.751.001.251.501.752.002.252.502.753.003.253.50

Dealers Survey Median, May 2017 (±) 25th Percentile

FOMC Mean, Mar. 14-15, 2017 (EOP) FOMC Median, Mar. 14-15, 2017 (EOP)


BBVA Fed Funds Firming Pace Forecast


FEDERAL FUNDS RATE

(%, Upper Bound, End of Period)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

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


BBVA Baseline Forecasts of Treasury Bill Yield


3-MONTH TO 12-MONTH RATES

(%)

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 19

3M 6M 12M


3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17

Index Mean since 2003

Long-Term Yield Volatility Has Normalized Below Historic Mean

10 Source: BBVA Research, Chicago Board Options Exchange and Bloomberg

10-YEAR U.S. TREASURY NOTE VOLATILITY

(Daily index)

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

traded options on the Treasury Note futures


Downward Pressure on Term Premium Resumed

11 Source: BBVA Research and Federal Reserve Board

10-YEAR U.S. TREASURY TERM PREMIUM & MARKET INFLATION EXPECTATIONS

(Weekly, %)

-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 Jan-17

10-Year U.S. Treasury Yield Average Expected Future Short Rates

Implied 10-Year Spot Inflation Rate Ex-Ante Term Premium


Mid-Term Duration-Risk Compression Has Stabilized

at 11 Basis Points

12

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.

DURATION-RISK COMPRESSION

(Daily, %)

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

-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


-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

Long-Term Duration-Risk Compression Has Stabilized

at 10 Basis Points

13

Calculated as the difference between 10-Year and 5-Year term premium reported by the New York Fed ACM (Adrian, Crump, and Moench) five-factor, no-arbitrage term structure

model incorporating pricing factors.

DURATION-RISK COMPRESSION

(Daily, %)

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


Futures Declined, Discounting a 6bp Raise in 10YTN Yields

Over the Next 2 Quarters


10-YEAR U.S. TREASURY YIELD FUTURES – MOST RECENT, 1 WEEK PRIOR, 1 MONTH PRIOR, 3 MONTHS PRIOR

(%)

2.825

2.950

3.075

3.200

Jun-17 Sep-17 Dec-174/4/17 5/2/17 5/23/17 5/30/17


10-Year Treasury Yield Forecasts

15

* National Association for Business Economics (NABE) Outlook median forecast compiled from a panel of NABE members. Last release date March 26, 2017

** Survey of Professional Forecasters (SPF) conducted by Federal Reserve Bank of Philadelphia. Last release date May 12, 2017

*** Congressional Budget Office (CBO). Last release date January 24, 2017

**** Administration: 2018 Budget. Last release date May 23, 2017

10-YEAR U.S. TREASURY YIELD

(%)

Source: BBVA Research, NABE, FRB Philadelphia, CBO and Haver Analytics

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 Risk

Upside Risk NABE* (EOP, Mar 26) SPF** (EOP, May 12)

CBO*** (Yr. Avg, Jan 24) Administration**** (Yr.Avg, May 23)


Yield Curve Slope Forecasts


TREASURY YIELD CURVE SLOPE

(%, 10Y-2Y)

-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 20

Historic Baseline Downside Risk Upside Risk


Treasury Yield Curve Baseline Forecasts


U.S. TREASURY YIELD CURVE

(%)

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.

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 19

2Y 3Y 5Y 10Y 30Y


Yield Curve Forecasts

18

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.

TREASURY YIELD CURVE BASELINE FORECAST

(%, End of Period)

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

1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

10-Year Average 2016 2017 2018 2019


Swap Curve Baseline Forecasts

19

U.S. SWAP RATES

(%)

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

5.5

6.0

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

2Y 3Y 5Y 10Y 30Y


LIBOR Curve Baseline Forecasts


U.S. DOLLAR LIBOR RATES

(%)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

1M 3M 6M 12M


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.

DISCLAIMER

Documents

U.S. Interest Rates Chartbook - BBVA Research...U.S. INTEREST RATE CHARTBOOK MAY 2017 June Rate Hike Probability is at 98% 4 Source: BBVA Research and Bloomberg FED FUNDS FUTURES IMPLIED