U.S. Interest Rates Chartbook. November 2017...U.S. INTEREST RATE CHARTBOOK │ NOVEMBER 2017 Fed funds futures rise as the FOMC near-term policy outlook has firmed 6 Source: BBVA

U.S. Interest Rates Chartbook

November 2017

U.S. INTEREST RATE CHARTBOOK │ NOVEMBER 2017

Takeaways

A December Federal funds rate increase to the 1.25%-

1.50% range is warranted given upbeat third quarter

economic performance with the GDP annualized growth rate

revised upward to 3.3% and unemployment at a 17 year low.

Fedspeak is aligned with forecasts and market expectations:

“I think the case for raising rates at our next meeting is

coming together” Powell, Fed Chair nominee, Senate

hearing, November 28, 2017

“We continue to expect that gradual increases in the federal

funds rate will be appropriate” Yellen, Fed Chair,

Congressional testimony, November 29, 2017

Fed funds futures are fully pricing in a December rate hike,

along with an implied probability of 60% for a subsequent

hike in March 2018.

10-Year Treasury note volatility has dropped to a new

historic low.

Downward pressure on long-term yield term premium

remained and duration-risk compression has crossed over

into negative territory.

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

with the yield curve slope flattening by an additional 20 basis

points.


Unconventional monetary policy

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

FEDERAL FUNDS RATE AND 10-YEAR TREASURY 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

Start QE3 Taper

3rd

Rate

Hike

2nd

Rate

Hike

4th Rate

Hike


Sixth rate hike is priced in for 1Q18

4 Source: BBVA Research and Bloomberg

FED FUNDS FUTURES IMPLIED PROBABILITIES, SIXTH 25BP HIKE

(%)

-

10

20

30

40

50

60

70

80

90

100

11/1/2017 11/22/2017 11/29/2017

Jan-18 Mar-18 May-18 Jun-18


Dealers’ expectations for the long-run fed funds rate remains in

line with the median FOMC projection of 2.75%

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

PROJECTED PACE OF POLICY FIRMING

(%)

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

Dealers Survey Median, Oct 23, 2017 (±) 25th Percentile

Dealers Expected Median of FOMC FFR SEP (EOP) FOMC Median, Sep. 20, 2017 (EOP)

Survey of Primary Dealers is formulated by the Trading Desk at the Federal Reserve Bank of New York. Last received date September 11, 2017


Fed funds futures rise as the FOMC near-term policy outlook

has firmed


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

(%)

1.000

1.125

1.250

1.375

1.500

1.625

1.750

1.875

2.000

Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

8/23/2017 11/1/2017 11/22/2017 11/29/2017


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 FOMC Median, Sep. 20, 2017


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 20

3M 6M 12M


3.0

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 Jul-17 Oct-17

Index Mean since 2003

Long-term yield volatility has further declined to a new

historic low

9 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 is unchanged

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

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

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 crosses over from near

zero into negative territory

11

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 crosses over from near

zero into negative territory

12

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 discount an 8 basis point rise in 10-year Treasury

yields over the next 3 quarters


10-YEAR U.S. TREASURY YIELD FUTURES – MOST RECENT, 1 WEEK PRIOR, 4 WEEKS PRIOR

(%)

3.010

3.035

3.060

3.085

3.110

3.135

3.160

3.185

Dec-17 Mar-18 Jun-18

11/1/17 11/22/17 11/29/17


Primary dealers expect the 10-year Treasury yield to remain in

the range of 2.01-2.50% at year-end 2017

14

Survey of Primary Dealers is formulated by the Trading Desk at the Federal Reserve Bank of New York. Last received date October 23, 2017

PROBABILITY OF THE 10-YEAR U.S. TREASURY YIELD FALLING IN EACH OF THE FOLLOWING RANGES

(%, Average)

Source: BBVA Research and FRB New York

0

10

20

30

40

50

60

≤ 1.50% 1.51 - 2.00% 2.01 - 2.50% 2.51 - 3.00% 3.01 - 3.50% 3.51 - 4.00% ≥ 4.01%

Year-end 2017 Year-end 2018


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 September 24, 2017

** Survey of Professional Forecasters (SPF) conducted by Federal Reserve Bank of Philadelphia. Last release date November 13, 2017

*** Congressional Budget Office (CBO). Last release date June 29, 2017

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

^^ Economic Forecasting Survey. The Wall Street Journal surveys a group of more than 60 economists on a monthly basis. Last release date November 11, 2017

10-YEAR U.S. TREASURY YIELD

(%)

Source: BBVA Research, NABE, FRB Philadelphia, FRB New York, CBO, WSJ 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, Sep 24) SPF** (EOP, Nov. 13)

CBO*** (Yr. Avg, Jun 29) Administration^ (Yr.Avg, May 23) WSJ EFS^^ (EOP, Nov 11)


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

06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

2Y 3Y 5Y 10Y 30Y


Yield curve forecasts

18

*BBVA Research baseline forecast. 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* 2020*


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 20

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 20

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. November 2017...U.S. INTEREST RATE CHARTBOOK │ NOVEMBER 2017 Fed funds futures rise as the FOMC near-term policy outlook has firmed 6 Source: BBVA