Although we don't always agree with the market discount, the position in which it is right now serves to frame the context for the 10yr Treasury yield over the coming few weeks.

How Rates Spark Controversy: Can Christine Match Jerome's Composure?

The more Chair Powell spoke yesterday, the less hawkish his tone became. But he didn't go too far. The ECB's Lagarde comes next, who is more prone to err. The point is not the 25bp increase. It's the tone. We show that the US 10-year yield appears low in comparison to the strip, whereas the 10-year Euribor rate appears high in comparison to the strip.

The Fed cements a moderate rate-cutting discount ahead, putting upward pressure on Treasury yields.

One of the significant takeaways from the Federal Open Market Committee (FOMC) meeting was how the Fed decision and subsequent commentary may affect the Fed funds strip. Specifically, after the hike and into the discounting completion of the rate-cutting period. This is significant because where the fed funds strip stands in 2025 has a significant impact on longer-dated Treasury rates, as the 10yr yield, for example, should not trade much over the longer dates on the strip. In reality, they should trade at a 30bp premium (above it).

The FOMC meeting, with a rate of just under 4% projected for January 2025. It remains after the meeting, but it is now closer to 3.9% (as it varies, often on low volumes). Remember, when Silicon Valley Bank failed, this was down roughly 3%. The fact that it is currently 100 basis points higher limits the amount that the 10-year Treasury yield can fall.

In fact, it should rise, and we continue to aim for 4% in the future weeks, compared to a present level of roughly 3.9%. This is roughly equal to the expected funds rate in January 2025. That's too low for the 10-year yield, as it suggests no curve just as the Fed's rate-cutting cycle is coming to an end.

Although we don't always agree with the market discount, the position in which it is right now serves to frame the context for the 10yr Treasury yield over the coming few weeks. Through its bond roll-off scheme, the Fed is still progressively tightening. Less volume returning to the Fed through the reverse repo facility has had the biggest impact as a result of this. In reality, bank reserves have not changed.This enables the Fed to continue applying pressure to tighten the monetary policy. Additionally, it prevents the bills curve from moving into a state of material inversion and maintains upward pressure on bill rates. least of all not yet. All other major rates have been increased by 25 bps, with the reverse repo rate currently standing at 5.3%.

The ECB will equal the Fed, but the 10-year Euribor rate will trade with more cushion.

On Thursday, the European Central Bank is expected to raise interest rates by 25 basis points. The refi rate will rise to 4.5%, while the deposit rate will fall to 3.75%, with the latter remaining significantly relevant in terms of where front end Euribor rates are really positioned. The current 3-month Euribor rate is just over 3.7%, which is close to the deposit rate. And, with the Euribor strip extending up to 3.9%, it's just about discounting another 25bp boost.

The statements of President Lagarde will be the focus of the most attention. Chair Powell began by sticking to script, but gradually morphed into a recognition that inflation had actually fallen, the real rate had risen, and the economy was definitely in a restricted situation. He was almost on the verge of a reference towards an eventual rate-cutting course as the conference progressed. Lagarde will have to be more cautious. Chair Powell does not depart much from the script, whereas Lagarde can.

Looking out along the Euribor strip, the 3mth rate is estimated to be below 3% by the middle of 2025, and it remains below that level, falling to 2.7%. There is a difference between that and the 10-year Euribor rate, which is currently at 3.6%. In comparison to the US, the 10-year Treasury yield is already flat to or below where the Fed funds strip is positioned. Part of this is due to the deposit rate's tendency to have an outsized influence, but not entirely. On this simple measure,, the 10yr Euribor is more valuable.