Kroll Bond Rating Agency Publishes Research: Interest Rate Outlook - Balancing the Markets and the FOMC

NEW YORK--()--Kroll Bond Rating Agency (KBRA) has released a new research note entitled “Interest Rate Outlook: Balancing the Markets and the FOMC.” The report makes the following key points:

  • In two days of testimony on Capitol Hill, Federal Open Market Committee Chair Janet Yellen provided little in the way of firm guidance as to the future of U.S. monetary policy. Depending on whom you ask, KBRA notes, the FOMC chief either signaled a certain rate hike next month, or no change in the near term. What is apparent, however, is that Yellen is rapidly migrating from a pro-growth, dovish posture to that of an inflation hawk in the wake of November’s election.
  • Even as Treasury bond yields have remained elevated, corporate bond spreads have continued to tighten, particularly high-yield spreads, which are now inside 400bp over the Treasury yield curve. During this same period the major U.S. equity market indexes have reached all-time highs, with the S&P 500 index now over $20 trillion in equity market value. This exuberance is driven by investor expectations that promised tax cuts will boost economic growth.
  • KBRA believes that the core dynamic driving trends in the U.S. bond market at present is the hope of economic stimulus care of the Trump Administration versus the reality of strong demand for assets. We view the promises of heightened GDP growth coming from the White House with skepticism and believe that the more likely prospect of stable, if moderate growth is a better reason for investor optimism.
  • To us, the bond market will eventually win this argument with the Trump White House and take the 10-year Treasury back down towards two percent, leaving Yellen and the FOMC with a significant dilemma. Low rates and aggressive open market purchases of securities by the FOMC have shifted the demand curve for investments and thereby inflated asset prices far about levels supported by the underlying cash flows, suggesting to KBRA that an eventual adjustment is inevitable.

To view the report, please click here.

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About Kroll Bond Rating Agency

KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).

Contacts

Analytical:
Kroll Bond Rating Agency
Christopher Whalen, 646-731-2366
Senior Managing Director
cwhalen@kbra.com

Contacts

Analytical:
Kroll Bond Rating Agency
Christopher Whalen, 646-731-2366
Senior Managing Director
cwhalen@kbra.com