Over the last nine months we have seen the biggest yield curve shock in over twenty years. After the CPI print for May came in at a higher than expected 8.6% year-over-year rate, the yield curve has rocketed even higher and we are seeing red across virtually all bond prices. In the price table below, you’ll see that 3-year and 5-year yields are now at 3.55%, up from around 2.75% at the end of May.
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Source: Bloomberg, 1:15pm EST 6/14/22
The dramatic rate move is driven by a higher probability of a 75bps rate hike tomorrow at the conclusion of the FOMC’s June meeting and again at the late July FOMC meeting. With these adjusted expectations the market has priced in an implied Fed Funds rate of nearly 4% by February, 2023, up from 3% just a few weeks ago.
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Source: Bloomberg, 1:15pm EST 6/14/22
This significant adjustment in rate hike expectations paired with stubbornly high inflation has resulted in the highest investment rates we’ve seen in about 15 years. In the chart below you’ll see the change since the start of the month. With this move, we’ve seen all products that trade at a spread to Treasury bonds–like Agency MBS/CMOs, Agency bullets, and Agency callables–largely keep up with the move. For example, we see PAC CMOs with 4-year average lives offered at better than 4.00%. However, CD rates haven’t kept up with the move over the last couple days, with most offerings about 40bps under Treasury rates. If rates stick, hopefully the CD rates will reset to market rates, but they currently do not offer any relative value to credit union investors. Additionally, and also unfortunate, credit unions with significant available-for-sale portfolios should brace for additional mark-to-market losses if this rate move sticks through the end of the month.
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Source: Bloomberg, 1:27pm EST 6/14/22
As always, if you would like to learn more about recent market developments and potential investment strategies, please reach out to your Accolade investment adviser representative.
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