U.S. interest rates can be characterized in two main ways, by credit quality and by maturity. Credit quality refers to the level of risk associated with a particular borrower. U.S. Treasury securities, for example, carry the lowest risk. Maturity refers to the time at which the security matures and must be repaid. Treasury securities carry the full spectrum of maturities, from short-term cash management bills, to T-bills (4-weeks, 3-months, and 6-months), T-notes (2-year, 3-year, 5-year and 10-year), and 30-year T-bonds. The most active futures markets are the Treasury note and bond futures and the Eurodollar futures, which are all traded at the CME Group.
Prices - 10-year T-note futures prices in the first half of 2013 traded sideways, modestly below the record high from mid-2012. As the economy gathered strength, market expectations for the Fed to begin tapering its third quantitative easing program (QE3) rose and T-note prices tumbled to a 2-year low in September 2013. However, dysfunction in Washington kept lawmakers from passing a continuing resolution or a hike in the debt ceiling, which prompted the Fed to delay QE3 tapering. T-note prices recovered into November as the malaise in Washington led to a partial government shutdown during Oct 1-16 that undercut the U.S. economy and boosted safe-haven demand for T-notes. However, T-notes resumed their slide in late November as U.S. economic data remained strong and the Fed finally went ahead with its initial taper of QE3 at its Dec 17-18 FOMC meeting. T-note prices ended 2013 at a 2-1/2 year low.
T-note prices found support in the first half of 2013 from signs of weakness in the global economy along with headwinds for the U.S. economy from tighter fiscal policy and reduced government spending. The U.S. economy faced headwinds from the fiscal cliff agreement in late 2012 when Congress raised tax rates on joint income above $450,000 and allowed the two percent payroll tax holiday to expire. Moreover, the $1.2 trillion of automatic spending cuts over 10 years went into effect on March 1, 2013, resulting in significant across-the-board spending cuts for social and defense spending.
The 10-year T-note yield spiked higher by more than +1 percentage point in mid-2013 to post a 1-year high of 3.01% in early September as the market expected the Fed to start tapering QE3 at the September FOMC meeting. However, the Fed surprised the markets and kept its QE3 program intact until December 2013 mainly because of the uncertainty caused by the U.S. government shutdown in October 2013. The 10-year T-note yield fell back to the 2.50% area by October thanks to the delayed Fed QE3 tapering and the Oct 1-16 shutdown. The 10-year yield continued to move higher after the Fed's tapering move in December and finished 2013 at a 2-1/2 year high of 3.03%. The market expects the Fed to continue tapering QE3 by $10 billion at each FOMC meeting during 2014, which should finish by Q4-2014. Nevertheless, the market is still expecting the Fed to keep its zero interest rate policy in place until at least 2015.
U.S. interest rates continue to trade at extraordinarily low levels due to the Fed's zero interest rate policy, the Fed's ongoing QE3 program, and low inflation. Even though the Fed in December 2013 started reducing the size of its QE3 program, the Fed's security purchases are still helping to keep mortgage rates and longer-term Treasury yields lower than they would be otherwise.
Articles from the Commodity Research Bureau (CRB) Commodity Yearbook. The single most comprehensive source of commodity and futures market information available, the Yearbook is the book of record of the Commodity Research Bureau, which is, in turn, the organization of record for the commodity industry itself. Its sources - reports from governments, private industries, and trade and industrial associations - are authoritative, and its historical scope is second to none. Additional information can be found at www.crbyearbook.com.