Tying it all together, the robust outlook for growth will certainly accelerate job creation in the coming months, but a full recovery in the labor market won’t come until long afterwards. As of February, 9.5 million Americans were still out of work, equating to a jobless rate of about 9.1% after accounting for those who have exited the labor force. As such, despite the rosy growth outlook, the Fed will continue to look toward progress on the jobs front – not economic growth – to guide its decisions on the timing and degree of rate hikes. The Fed will continue its steady as she goes approach, holding off on easing back the throttle until the jobs market is near recovery. In the meantime, long-term Treasury yields, like the 10-year Treasury, will be free to climb even higher as they further assimilate improving economic prospects.

What to Watch This Week: The data slate in the days ahead is filled with mostly second tier indicators, with signals on new and existing home sales (Monday) Durable Goods Orders (Wednesday), the final reading of Q4 GDP (Thursday), and Personal Income and Spending, and Consumer Sentiment (Friday).

Taken together, this week’s calendar will exhibit data on activity that occurred whilst caught between two waves of fiscal stimulus and may reflect a brief hangover between rounds of income supplements from the federal government. Hence, don’t be surprised or come to false conclusions if we see worse than expected signals – next month’s readings on the same data are poised to make the January surge pale in comparison.

Outside of data, markets will also be tuned into a slew of Fed speakers in the days ahead, especially Chair Powell, for fresh insights. A continued message of patience on tightening rates could spark some to exit bets that hikes may come earlier than the Fed projects.

Big Picture: With the Treasury yield curve recently steepening  (a widening difference between short and long-term yields) to levels not seen since 2016, the Fed is smiling, observing the dynamic as a positive sign that markets believe the economic recovery is indeed happening and content to let markets do the work – via higher long-term rates – of tapping the brakes on economic expansion.

With the positive effects of the next round of fiscal stimulus yet to show its impact on the economy, it’s likely that long-term interest rates will rise even higher still. Since the Fed firmly on hold, that equates to an even steeper yield curve.

Financial market pundits have been keen to suggest the Fed will intervene by tweaking the makeup of its Treasury bond purchases to arrest rising long-term yields. We doubt it. Looking back at economic history, the current steepness of the curve is nowhere near its peak. The Fed’s actions to date have kept the curve much flatter than is typical in past easing cycles. Over the past three decades, the yield difference between the 5-year/30-year and 2-year/10-year Treasury yield curves usually peak a bit above 200 bps. That’s far away from the 1.55-ish in steepness we’re seeing now. Historically, these yield curves then begin to flatten as the market anticipates looming Fed action to ease off the stimulus throttle. We expect the same dynamic this time around; long-term yields will likely move higher before they fall markedly – months from now – under the threat of the Fed spoiling the growth party.

Is your debt portfolio prepared for the new world of higher interest rates? Call us to find out.

Current Select Interest Rates:

Rate Cap & Swap Pricing:

LIBOR Futures:

Source: Bloomberg Professional

10-year Treasury:

Source: Bloomberg Professional