It appears that the yield curve will continue to remain in its current familiar surroundings, notwithstanding a ‘surprise occurrence’ in the financial markets of the world. It would appear that there is not much ‘good news’ around to change the status of ultra low yields on the short end of the curve. One of the key questions moving forward will be – who will buy our debt? With China continuing to ‘unload’, especially in the short end, who will step forward (other than the Fed)? Another interesting item to ponder at this time is: what does an interest rate stress test on the Fed’s currently ballooned balance sheet look like!
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Friday's weak jobs report will likely lead to the Fed maintaining the current target for the funds rate through this year and into early 2012. While most market participants had expected Fed policy to remain on hold through this year, the report showing anemic job growth led to those that had been holding out for an increase to start to throw in the towel.
According to the Fed Funds futures market, the probability of a hike in the funds rate to 0.50% by the end of this year has declined from 14.2% one-month ago to 11.4% now. Similarly, Eurodollar futures are projecting 3-month LIBOR to remain exceptionally low through mid-2012. The implied rate for 3-month LIBOR to March 2012 is 0.47% and through June 2012 is 0.61%.
(Stone & Youngberg Portfolio Strategy Group – June 6, 2011)
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