The uncertainty about future rate hikes

The last two months have featured several important events impacting the interest rate scenario in the US. The new Federal Reserve chair, Jerome Powell, was confirmed and another rate hike is expected in December. The reaction of markets (BND), however, has not been uniform along the yield curve.

The November meeting’s minutes, which were published on November 22, indicated that the Fed members were still concerned about inflation (TIP) remaining low.

Why Decreasing Credit Spreads Are a Cause for Concern

If future inflation expectations remain low, long-term yields would not move higher by the same percentage as short-term rates.

Such a situation leads to a narrowing credit spread, leading to a flattening of the yield curve and eventually an inverted yield curve. An inverted yield curve is a sign of future recession.

Yield spreads used in the Conference Board LEI

The Conference Board Leading Economic Index (or LEI), in its economic model, uses the credit spread between the ten-year Treasury bond (IEF) and the federal funds rate (TBF) as one of the components.

The November Conference Board report, which takes October data into account, reported the credit spread at ~1.2—an improvement from the September reading of ~1.1.

This brings the indicator marginally higher, and it had a net positive impact of 14% on the November LEI. The situation has since changed, and credit spreads have moved lower in November. The impact of this trend should be seen in the December report.

Outlook for credit spreads

The outlook for credit spreads is not a straightforward answer in the current economic climate. Future credit spreads would be dependent on inflation (VTIP) expectations, which are always subject to change.

Although the current communication from the Federal Reserve signals one rate hike in December 2017 and three more in 2018, inflation could remain below 2.0%. This disparity between rates and inflation could put further pressure on credit spreads.

Latest articles

On Tuesday, Tesla (TSLA) cut the prices of its vehicles to standardize its global car line-up, according to Reuters.

Yesterday, PayPal (PYPL) announced that it would expand Xoom, which is its international money transfer service, to 32 markets in Europe.

Visa stock has risen about 37% and has outperformed the S&P 500 Index so far in 2019.

16 Jul

What to Expect from Skechers’s Q2 Results

WRITTEN BY Sharon Bailey

Skechers (SKX) is set to declare its results for the second quarter after the markets close on July 18. Here's what you should know.

On Tuesday, Canadian Pacific Railway (CP) reported strong second-quarter earnings. The company's top and bottom lines touched a record mark.

16 Jul

What to Expect from Crown Castle's Q2 Results

WRITTEN BY Sushree Mohanty

Crown Castle International (CCI) is scheduled to announce its second-quarter earnings results on Wednesday after the market closes.