Deposit Funding Compass Week of October 18, 2023

Treasuries tumbled, driving two-year yields to a 17-year high, after a surprisingly large jump in retail sales last month increased speculation that the Federal Reserve will raise interest rates again. Yields rose across the maturity spectrum led by the five-year, which rose as much as 17 basis points to the highest level since 2007. The two-year note’s rise to 5.207%, last seen in 2006, exceeding its Sept. 21 high. The 10-year Treasury yield rose as much as 15 basis points and approached 4.86%, just shy of the year-to-date peak reached on Oct. 6, which was the highest level since 2007. Swap contracts tied to Fed rate decisions showed traders are pricing in more than 60% odds that policymakers will raise interest rates by another quarter percentage point in January after holding steady in November. A move in December is considered possible but less likely than January.

Liquidity in the CD market has been easy to find inside of the 3yr maturity mark but beyond that point participants face increasingly attractive alternatives in the aforementioned US treasury curve as investors in CDs demand a premium to risk free US debt. Embedded call options still remain an attractive option to extend duration at little relative premium to short term pricing though that spread too has begun to widen. We anticipate a busy November as banks look to get in front of what is typically a crowded market at year end and an increasingly likely additional rate hike in the beginning of 24’.