A fixed income chart guide to today’s FOMC meeting

Bonds
Althea Spinozzi

Fixed Income Strategist

Summary:  Find a chart pack to guide you through the major bond market's themes as the FOMC meeting unfolds.


Ahead of the FOMC meeting, the 10-year US Treasury yield has broken above 1.65%, entering a fast area. Many have pointed out that at this level, the selloff in government bonds will intensify as it is most likely to provoke another convexity event within the Mortgage-Backed Securities space, which will push investors to sell Treasuries to decrease their portfolio’s duration. We believe that if the Federal Reserve disappoints, 10-year yields will quickly rise to test a new resistance level at 1.75%.
Source: Bloomberg and Saxo Group.

Depending on the Federal Reserve’ economy outlook, Breakeven rates can be sensitive driving US Treasury yields higher. 

The 5-year Breakeven rate continues to rise. If it breaks above 2.72%, it will record the highest inflation expectations since 2006, weighting on the curve’s belly. We might see another spike in 2s,10s,30s butterfly as it catches up with inflation expectations.

Source: Bloomberg and Saxo Group.
However, the 2s,10s,30s butterfly is flat on the day. The 5s,10s,30s butterfly rose by 4bps, becoming the cheapest since 2014 as 10-year yields rose faster than other maturities. The move indicates troubles ahead in the corporate space as these securities’ price is set according to this part of the US yield curve. 
Source: Bloomberg and Saxo Group.
In the coming days, you should pay attention to what happens in the corporate bond space. Since December, the yield offered by these securities is below the 10-year Breakeven rate, meaning that inflation will erode all the yield offered by these securities. As Treasuries continue to tumble, bearish sentiment will most like provoke a duration even that would see the US investment corporate space repricing. The US junk space might prove resilient as the duration in high-yield corporate bonds is less than half compared to that of investment-grade corporates (3.5 years in HY versus an average of 8 years in IG)
Source: Bloomberg and Saxo Group.
Ultimately the question is whether volatility will leak from the bond to the stock market. 
Source: Bloomberg and Saxo Group.

Finally, let’s not forget that tomorrow the US Treasury will issue 10 year TIPS and it will be important to understand whether investors seek protection against it after the FOMC meeting.

Source: Bloomberg and Saxo Group.
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.