Heading into July FOMC meeting
The July policy committee meeting in Washington is likely to lead to a further $10 billion reduction in bond purchases, reducing its monthly amount to $25 billion. By October, the FOMC will have likely dispensed with the program. Chairman Janet Yellen has largely laid the groundwork for this meeting by pointing to disappointment with the housing market and stating in bold terms that the decline in the headline unemployment rate is only part of the overall labor market picture. Today’s chart of the day examines the subtle shift within the U.S. yield curve.
Chart – Curve steepens even as 10-year yields plumb recent lows
The black line shows the 10-year government yield. The blue line measures the gradient of the cash curve using implied three-month forward rates derived from CME-traded Eurodollar futures. Precisely, this curve measures the shape of the yield curve starting at the end of 2014 through the end of 2015. The higher the line rises, the more positive is the yield curve indicating the relative degree of monetary tightening implied by the futures market.
Currently, the curve has a positive slope of 80 basis points. At the same time the US 10-year yield stands at 2.45%. In recent months, yields have tracked higher heading into both nonfarm payroll reports and FOMC meetings. This week investors must face both but so far show few signs of panic. About one month ago, when the Treasury note was last as low as it is today, the forward curve was priced at just 57 basis points (see circles on chart). It would seem that fixed income investors are warming to the Fed’s message that inflation will remain low, but they are having a hard time believing what the central bank has to say about the tenure of easy monetary policy beyond the end of its asset purchase program.