While we do not expect Federal Reserve Chair Janet Yellen to send an overt signal about March in her twin testimonies on Capitol Hill tomorrow and Wednesday, we do think she will affirm the Fed’s confidence in the near term outlook and the high likelihood for a gradual pace of continued rate hikes.
And if that is taken by the market to be relatively hawkish, from the Fed’s perspective, that may not be a bad thing.
*** We still think a March rate hike is more unlikely than not, but there does seem to be an undercurrent of sentiment within the FOMC strongly leaning to a more tactical positioning for a March rate hike or at minimum, to open the door more explicitly to a rate move in May. In that sense, the “every meeting is live” mantra of the previous years is finally more real than rhetoric. ***
USTs Fall, Eurodollars Steepen, as Yellen Raises March Odds 10:12
Treasuries sharply lower in response to Yellen text which says “waiting too long to remove accommodation would be unwise,” and that further adjustment would likely be needed if economy is on track.
• 5s30s aggressively flattens in response, reaches 109.5bp, flattest since Jan. 20 and 1.7bp flatter on the day
• 10Y futures sell off around 12 ticks, reach 124-03, matching Feb. 3 lows
• Eurodollar strip bear steepens with whites lower by 1bp-3bp and greens, blues lower by 6bp
Fed fund futures based on April 2017 contract show about 34% chance of a rate hike at the March FOMC meeting vs 30% pre-testimony