30-Day Fed Funds Aug '23 (ZQQ23)

Description

US interest rates can be characterized in two main ways, credit quality and maturity. Credit quality refers to the level of risk associated with a particular borrower. US 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 symbol ZN) posted their high for 2023 in March. T-note prices had support in early 2023 as the Federal Reserve signaled it was nearing the end of its aggressive interest rate hiking campaign. At the March 2023 Federal Open Market Committee (FOMC) meeting, the central bank raised its federal funds rate target range by +25 bp to 4.75%-5.00% but was less hawkish in its post-meeting language. The FOMC shifted to an outlook for "some additional" policy firming versus its previous outlook for "ongoing" rate increases. T-note prices also garnered some safe-haven demand after the collapse of Silicon Valley Bank in March 2023.

T-note prices traded sideways into May 2023 when the FOMC raised its federal funds rate target range by +25 bp to 5.00%-5.25%, but Fed Chair Powell suggested the FOMC might pause its tightening campaign in June to assess how the US economy was responding to tighter credit conditions resulting from higher interest rates and stress in the banking sector.

The FOMC at its June meeting left its funds rate target unchanged but implemented its final +25 bp rate hike to a 22-year high of 5.25-5.50% at its July meeting. Fed Chair Powell, at the July meeting, left open the possibility of further rate hikes by saying the Fed still had a long way to go to return inflation to its 2% goal. In fact, US consumer prices remained sticky as they rose to +3.7% yr/yr in August after falling to a 3-year low of 3.0% yr/yr in June.

After July, the FOMC left its funds rate target unchanged at 5.25%-5.50% for the rest of its meetings in 2023. However, at its September meeting, the FOMC's guidance remained hawkish as policymakers indicated they might tighten monetary policy further and scaled back estimates for interest rate cuts in 2024. T-note prices tumbled to a 16-year low in October, and the 10-year T-note yield jumped to a 16-year high of 5.02%.

T-note prices recovered moderately into year-end as the US unemployment rate in October remained at a 2-year high of 3.8%, and the US November CPI eased to +3.1% yr/yr from +3.7% yr/yr in September. At its December meeting, the FOMC's dot plot indicated that FOMC members expected no further interest-rate hikes and instead expected an overall interest rate cut of 0.75 percentage points in 2024. The FOMC, at its December policy meeting, also shifted its guidance to a more dovish tone, with officials noting they would monitor a range of data and developments to see if "any" additional policy firming was appropriate. The 10-year T-note yield finished 2023 little changed at 3.88%.

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