Last week we got new CPI and PPI data. Both came down on a YoY basis but ticked up slightly MoM. Despite this, rates came down a bit on the week. 2-year Swaps came down about 5 BPS, and 10-year Swaps came down about 6 BPS. The dollar continues to weaken, which makes the Fed’s job of getting inflation back to 2% more challenging. All Treasury auctions went well last week. The 3-year has been rallying for a few months, pushing rates lower and prices higher.
The focus this week is on the highly-anticipated FOMC meeting. We’ll get a full Fed release this week, which includes new Dot plots, economic projections, and of course the expected Fed Funds move. The Fed is set to begin its rate cutting cycle, with Bloomberg predicting a 100% chance of a 25 BPS cut and a 60% chance of a 50 BPS cut. While 1-Month Term SOFR is already dropping in anticipation of the announcement, what happens with longer term rates may depend on what the Fed says rather than whether we get 25 or 50 BPS.
The Fed will allegedly target a terminal rate of roughly 3.25% and look to normalize the curve. A “normal” curve typically has a gap of roughly 150-200 BPS between 2’s and 10’s. Does this mean we’ll wind up with a 10-year Treasury in the 4’s? The Bank of England meets this week but is expected to not reduce rates. England & Europe have seen inflation resurge a bit, which is worth noting.
We maintain the stance that the market is being overly aggressive in its anticipation of cuts. With over 10 cuts (250 BPS total) priced in by EOY 2025, it’s a great time to execute low-strike hedges. 5-year term rates are attractive for refinancing, with Swap spreads at multi-year lows.
