• Black LinkedIn Icon
  • Black Twitter Icon

©2020 BY UNIVERSITY OF WATERLOO FINANCE ASSOCIATION.

Search

Fixed Income Market Update

Authors: Jerusan Jegatheeswaran Co-VP Education/ Research, Dragos Cada Co-VP Education/ Research, Alice Li Research Analyst, Amy Li Research Analyst, Helen Feng Research Analyst


Fed Holds Rates Steady

After two days of Federal Open Market Committee (FOMC) policy setting meeting, the Federal Reserve (Fed) decided on Wednesday to leave its interest rate unchanged and projected no rate hikes in 2019, which is a sharp dovish turn from policy projections just three months earlier when they predicted two rate hikes in 2019.

The Fed announced that it was keeping its benchmark rate — which can influence everything from mortgages to credit cards to home equity lines of credit — in a range of 2.25 percent to 2.5 percent. It also said it will stop shrinking its bond portfolio in September, a step that should help hold down long-term interest rates.



Economic Growth Cut

The move came along with reduced expectations in GDP growth. The Fed expects 2.1 percent growth this year, down from the 2.3 percent it forecast in December – and more than a percentage point less than the 3.2 percent growth the White House predicts. The outlook for 2020 is even weaker, with the Fed now projecting growth of just 1.9 percent.

It suggested that they may be more worried than previously about slowing domestic and global growth. The slowdown in China, driven by an ongoing trade war sparked by President Donald Trump, as well as uncertainty about Brexit, threatened the global economy.

The growth cut also came as the Fed saw signs of weakness in areas like consumer spending and business investment. The Fed noted “recent indicators point to slower growth of household spending and business fixed investment”, compared with January, when it noted, “household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year.”

Market Reaction

After the Fed’s anouncement of steady interest rate, the yield on benchmark 10-year Treasury note sank 8 basis points to 2.519 percent, its lowest level since January 2018. The yield on the 5-year Treasury bond dove 10 basis points to 2.328 percent, its lowest level since February 2018. The short-term 3-month Treasury bill traded with a yield of 2.473 percent and the 2-year note rate dropped 7 basis points to 2.4 percent. Note yields rise as bond prices fall.

The difference between the yield on the 10-year Treasury note and the yield on the 3-month Treasury bill was 5.5 basis points, the first time the yield curve flattened below 10 basis points since September 2007.



The dollar fell against a basket of currencies on Wednesday, after the Federal Reserve held U.S. interest rates steady and its policymakers abandoned projections for further rate hikes this year as the U.S. central bank flagged an expected slowdown in the economy. U.S. Dollar Index that tracks the greenback versus the euro, yen, sterling and three other currencies was down 0.7 percent at 95.93, its lowest since early February.

However, the trend reversed on Thursday due to the fact that interest-rate differentials still favour the dollar. The pause of rate hike in U.S. does not make other central banks’ rates go up. On Thursday, the gauge was up 0.4 percent at 96.32.

30 views