Well, that Was Fun!
Derivative Logic Inc.
Independent Interest Rate, Currency, Commodity Risk and Defeasance Advisors
This past week, markets were on edge, but better-than-expected economic data brought some relief, challenging earlier fears of a recession. The big question now is whether the over 100 basis points in rate cuts expected by year’s end will hold up as new inflation and jobs data roll in.
Treasury yields saw a sharp turnaround, erasing last week’s steep declines driven by recession fears. Solid economic fundamentals pulled markets back from the brink, but rate volatility is likely to stay elevated as uncertainty around upcoming Fed meetings and the U.S. election persists.
Let’s talk about where SOFR might be headed. The 3-month SOFR, a key gauge for interest rate hedging costs, fell slightly to 5.11%. Meanwhile, the implied rate on the 3-month SOFR futures contract a year forward rose, reflecting higher Treasury yields and fading recession fears.
Looking ahead, markets expect the 1-month SOFR to peak around 5.33% before declining as the Fed is anticipated to cut rates starting in September. The 10-year Treasury yield, meanwhile, is predicted to rise gradually, settling around 4.10% by the end of the week.
If you’re considering extending or replacing a rate cap, now might be the time to re-price. Rate volatility has dipped, driving rate cap costs down by 25-30% from their peaks.
The Fed’s latest Senior Loan Officer Opinion Survey shows tighter lending standards but stable demand for commercial loans, suggesting no immediate recession. Meanwhile, the services sector of the economy continues to show resilience, indicating that the U.S. job market and broader economy aren’t likely to fall off a cliff anytime soon.
This week’s inflation data will be crucial. If it signals higher inflation, yields could rise, potentially challenging the narrative of a soft economic landing. Fed officials will be speaking throughout the week, and they’ll likely emphasize that the economic data doesn’t yet justify significant rate cuts.
For those navigating interest rate swaps, we’ve seen an uptick in financing that involves swaps, and many borrowers might not fully understand the risks. It’s critical to stay informed and make data-driven decisions.
Remember, you can always check out our Market Data pages and calculators for the latest interest rate insights.