Interbank market news scan: Rates on Treasurys continue to inch up in week prior to Fed Day

The takeaway: As rates continue their rise, will Congress take their eyes off the ball?

The yields on two-year and ten-year Treasurys continued to inch up this week as the federal funds overnight market anticipates at least one more rate increase by the Board of Governors of the Federal Reserve. At the time of this writing, the 30-day fed funds options quote fell today to 94.99 from yesterday’s level of 95.07. This tells me that that market believes it is likely that the fed funds range will be at least 5.00% to 5.25% at the end of next week’s Federal Open Markets Committee meeting.

The yield on the two-year Treasury note climbed from 3.86% on Wednesday to 4.07% as of this writing. The ten-year Treasury note climbed to 3.53%, up from 3.40% reported on Wednesday.

There is an inverse relationship between the price of bond instruments and their yields. As yields increase, bond prices (values) fall. Banks holding these instruments may see a drop in their portfolio values. I have heard some commentators raise concerns about a continued bank crisis as a result of falling bank portfolio values. Other commentators believe that in the short run the worst of the crisis is behind the market. Dips in portfolios and bank runs may be yesterday’s news.

Congress appears, however, to linger in yesterday’s news. On 27 April the U.S. House Committee on Financial Services issued a press release demanding that the U.S. Department of the Treasury and the Federal Deposit Insurance Corporation provide additional information on their supervision efforts following the failure of Silicon Valley Bank and Signature Bank.

The U.S. Senate Committee on Banking, Housing and Urban Affairs seems to have moved on given its latest hearings focus on other areas except failed regional banks.

Congress’ hands are more tied than its mouth. The Congress is limited to writing legislation that may require more regulation on the part of the Federal Reserve, Treasury, and the FDIC. Regulations deemed restrictive by the banks could be used as a reason for further restrictions on lending including higher thresholds for borrowers to meet. Not only would that slow down economic growth, i.e., supply of money and currency, further lending restrictions may have a negative impact on constituents that need access to cheap capital. Aggressive moves on the part of Congress would put them in a political pickle.

On this first impression I expect both chambers of Congress to make the supposed banking crisis less of an issue especially as we move further into the campaign season. Congress, particularly congressional Democrats, do not want to be perceived as facilitators of a worsening political economy.

Yesterday’s reported low rate of economic expansion should put a brake on aggressive legislation. The U.S. Bureau of Economic Analysis reported that gross domestic product expanded 1.1% on an annual basis, lower than the market expectation of two percent.

Expect the upcoming Fed Day to be the optic that helps Congress look the other way.

Alton Drew

28 April 2023

The stats ….

30-day Fed Funds Options (ZQU3) 94.96

Effective fed funds rate: 4.83%

Federal funds target range: 4.75%-5.00%

Discount window: 5.00%

Interest on reserve balances: 4.90%

Two-year Treasurys: 4.07%

Ten-year Treasurys: 3.53%

Prime lending rate: 8.00%

Sources: CME Group, Board of Governors-Federal Reserve System, U.S. Department of the Treasury.