Description

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 a full spectrum of maturities, from short-term cash management bills, to T-bills (4-weeks, 3-months, 6-months), T-notes (2-year, 3-year, 5-year, 7-year, and 10-year), and 30-year T-bonds. The most active futures markets are the 10-year T-note futures, 30-year T-bond futures, and Eurodollar futures, all of which are traded at the CME Group.

Prices - CME 10-year T-note futures prices (Barchart.com electronic symbol ZN) posted their high for 2021 in January as they consolidated modestly below their all-time high from March 2020. Concerns about disruptions to the global economy from the Covid pandemic underpinned T-note prices in early 2021.

A surge in inflation expectations weighed on T-note prices in 2021 after the 10-year breakeven inflation rate climbed to an 8-year high in March. The markets became concerned the Fed was behind the curve when Fed Chair Powell, after the March FOMC meeting, said inflation was "transitory" and now "is not the time" to start thinking about tapering QE.

T-note prices then tumbled to a 2-year low in April 2021 on optimism the global economy would recover from the pandemic as the pace of vaccinations picked up. Fed Chair Powell said in April that "we feel like we're at a place where the economy is about to start growing much more quickly and job creation coming in much more quickly."

T-note prices rebounded from a 2-year low and ratcheted higher to a 6-month high in August 2021 on concern the economic recovery would be in peril as the emergence of the more-contagious delta Covid variant led to a resurgence of the pandemic. The resurgence of the pandemic forced many countries to impose restrictions that curbed economic growth.

The upside in T-note prices was brief, and T-note prices drifted lower for the remainder of the year as it became apparent that inflationary pressures were not dissipating. U.S. consumer prices in September 2021 rose to a 13-year high of 5.4%. That prompted the FOMC, at its September 2021 meeting, to say that moderation in its pace of bond-buying "may soon be warranted."

The FOMC, at its November 2021 meeting, announced that it would begin tapering QE by $15 billion a month starting in mid-November. A surge in inflation expectations also undercut T-note prices after the 10-year breakeven inflation rate soared to a 16-1/2 year high of 2.78% in November. T-note prices tumbled to a 2-year low in November.

U.S. inflation pressures continue to build after U.S. November consumer prices rose at a +6.8% yr/yr pace, the most in nearly forty years. The surge in inflation prompted an abrupt policy pivot at the Fed. The FOMC at the December 2021 meeting sped up the drawdown of QE to $30 billion a month from $15 billion, which put it on track to conclude its bond-buying program in March 2022, sooner than an earlier estimate of June 2022. The Fed then expected three quarter-point increases in the fed funds rate in 2022, up from zero rate increases projected for 2022 at its September meeting. The FOMC also raised its median projection for 2022 inflation to 2.6% from 2.3% in September and lowered its unemployment rate estimate for 2022 to 3.5% from 3.8%. The 10-year T-note yield finished 2021 up +0.60 percentage point at 1.51%.

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