USD Interest Rates Commentary

Interest Rate Market Snapshot
  Federal Funds SOFR 2Y Treasury 5Y Treasury 7Y Treasury 10Y Treasury
  5.33% 5.33% 5.04% 4.71% 4.74% 4.72%
Source: Bloomberg 
Powell and Co. leave rates unchanged, holding at 22-year highs
  • The FOMC voted unanimously to leave the Federal Funds target range unchanged yesterday, at the current lower and upper bound of 5.25%-5.50%

    • This keeps SOFR and the effective Federal Funds rate at ~5.30%
  • The official statement was left broadly unchanged as well, repeating phrases like “the extent of additional policy firming that may be appropriate” to keep the sentiment leaning hawkish 
  • But the rate hold, and the unchanged statement were a moot point for the markets as it was fully priced in for weeks now
  • The updated economic projections, however, did cause a stir and markets reacted
    • There, it was the Dot Plot that made the most noise
    • 12 of the 19 officials still expect one more rate hike this year, while the remaining 7 are comfortable with rates where they are today
    • With just a November and December meeting left, the incoming data over the coming weeks will be vitally important to that decision
    • Next year, the Fed is now expecting rates to only drop to 5.10%, roughly 2 less cuts than forecasted in June
    • More of that in 2025 too, with the Fed expecting rates to be at 3.90% by year-end vs. 3.40% in June
  • Why? The Fed sees resilient economic growth and employment requiring the need to keep rates “higher for longer” – same message that has been said for months now, but markets love graphs and now they have it
  • The takeaway seems to be that the Fed is just about done hiking rates. Despite another one penciled in for this year, focus is turning toward cuts – the timing of those cuts and the extent, with the revision of the Dot Plot being used to manage those expectations. However, given the uncertainties of student loan payments resuming next month, a looming government shutdown right around the corner, an auto workers’ union on strike, China navigating a real estate crisis and Europe flirting with stagflation, it does not surprise me that Powell used the phrase “proceed carefully” 13 times throughout the press conference

Powell at the podium

  • “Given how far we’ve come, we are in a position to proceed carefully”
  • “We’re fairly close, we think, to where we’ll need to get”
  • “Stronger economic activity means the Fed needs to do more on rates”… but “I wouldn’t want to handicap the likelihood of a soft landing”
  • “There’s so much uncertainty around the timing of rate cuts. The 2024 projections are just estimates made at the moment, nothing more than that”
Summary of Economic Projections – updated 
  • Fed Funds:

    • 2023: 5.60% (1 more hike possible)
    • 2024: 5.10% (2 less cuts than before)
    • 2025: 3.90% (2 less cuts than before)
  • GDP better than before – well north of recessionary levels
  • Unemployment better than before – soft landing positive
  • Inflation generally unchanged, puzzling many. The Fed has alluded to needing below trend growth to achieve 2% inflation, and the optimistic changes to both growth and employment are just the opposite of that
Source: Federal Reserve
The Fed’s new Dot Plot
Source: Bloomberg
Market Reaction
  • Like every FOMC meeting, there are nuances to digest, and this meeting had plenty

    • For example, the 2024 rate forecast is very wide. 13 of the 19 officials expect to cut rates next year (debating how much), 4 see rates unchanged, and only 2 see more hikes needed
    • In 2025, the range of outcomes is even greater. The highest rate projection is at 5.60% and the lowest is 2.63% - it’s a guessing game that far out
  • And those nuances may be behind today’s pullback on the front end of the curve
    • Yesterday, 2-year rates led the move higher. Trading 13 basis point higher from the intraday lows vs. 8-9 basis points for longer dated tenors
    • Today, 2-year rates are lower by 4-5 basis points while 10+ year Treasury yields are 10-12 basis point higher – extending the initial reaction from the Fed
  • The moves are steepening the curve quite a bit with the 2y/10y now retesting 4 month highs and the 3m/10y spread now less than 100 basis points apart

End-users be patient

  • For borrowers looking for an opportunistic entry point for hedging – be patient here

    • The difference between SOFR futures and Fed projections (despite how accurate these are for real forecasts) are now very narrow
    • And given bid/ask spreads in the 20-basis point range, the “savings” priced into 2–3 year swaps is negligible to what the Fed is forecasting
    • If anything, look to caps. Volatility premiums are easing and near the lowest point of the year (the MOVE Index is even testing 2022 lows)
Source: Bloomberg
Source: Bloomberg
Not only do longer dates yields look relatively expensive from the viewpoint of whats priced into swap rates, but they also look expensive from a fair value and technical perspective too:


Core PCE prints the lowest monthly advance since November 2020
  • The Personal Consumption Expenditures index, the Fed’s official and preferred inflation measure, came in lower than expected in August

    • Headline PCE rose 0.4% last month (0.5% expected) and Core PCE increased just 0.1% (0.2% excepted)
    • The slower than expected rise takes the annual change for both to 3.5% and 3.9% respectively
  • Despite playing second fiddle to CPI, today’s report is yet another encouraging development for the Fed’s inflation fight – the monthly core reading was the lowest in over 2 years, and the annual figure finally reached a 3 handle
  • And after relentless selling on the long end of the curve, the past two days have seen shorts begin to cover with today’s PCE report adding fuel to the rally
    • Since last Monday, 2-Year rates are just about unchanged. From opening at 5.04% on 9/18 to 5.05% today. Given the anchoring effect the Fed has on the front end of the curve, the sideways trading makes some sense. After the Fed meeting, there has been little evidence to suggest the market needs to reprice the risk of the Fed following through with an “insurance hike” in November. Current odds of a hike by year end: still only 35%
    • However, the long end of the curve is grappling with several cross currents that ultimately pushed rates higher over the same period. From the 9/18 open to the peak reached yesterday, the 10-year traded 35 basis points higher, yet has already covered 16 basis points over the past two days
    • It’s been a notable steepening of the yield curve and helps the transmission of monetary policy
Source: Bloomberg
The curve is steepening. Why?
  • The economic calendar has been light these past few weeks, and what has been released has come with little, if any, surprises
  • With that calm, comes the opportunity for the rates market to refocus on the fundamentals: credit quality, new issue supply and long-term demand
    • Caveated by rising oil prices, auto union strikes, and hawkish Fed comments sprinkled throughout of course

Credit Quality

  • Last month, Fitch downgraded the United States’ Long-Term Foreign-Currency Issuer Default Rating to 'AA+' from 'AAA', and the change has largely impacted longer dated tenors 

    • Since the August 1 announcement, 10 and 30-year Treasury bonds have traded 60-65 basis points higher. In fact, the Long Bond is now approaching a key resistance level not seen since 2011: 4.80%, a level tested 4 separate times post GFC 
  • With the government shutdown looming this Sunday, the threat of yet another downgrade is a clear and present danger
  • Moody’s recently commented that a shutdown would be “credit negative” for the sovereign rating. With a longer winded response sounding like: “While government debt service payments would not be impacted and a short-lived shutdown would be unlikely to disrupt the economy, it would underscore the weakness of US institutional and governance strength relative to other AAA-rated sovereigns…it would demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability”
  • Simply put, the risk of holding Treasuries is rising and that requires a higher yield to attract buyers. – at least for now


  • Ratings set aside; the US government has serious funding needs over the coming years

    • Total US Government Debt: now over $33 Trillion, 130% of GDP, and thanks to rising interest rates will see the interest payments triple from nearly $475 billion to $1.4 trillion by 2032
    • And according to the CRFB, by 2053, interest payments are projected to hit $5.4 trillion – more than the US spends on Social Security, Medicare Medicaid, and all other mandatory and discretionary spending programs
  • Higher supply, without an equal increase in demand, pressures prices lower (yields higher) – Econ 101


  • Historically, the largest buyers of US debt have been the Fed, foreigners, and primary dealers
  • And to absorb the expected flood of new supply, these buyers will need to step up, yet many are doing just the opposite
    • Through the process of Quantitative Tightening, the Fed has been rolling off their holdings of US Treasuries and agency debt to the tune of roughly $1 trillion a year, the fastest pace ever attempted
    • Central banks from just about every developed economy are in a rising rate environment. The EU and Japan for example, are both walking back historically accommodative policies, albeit at vastly difference paces – sending their government yields higher. China is an outlier in policy, but they too are buying fewer and fewer Treasuries. And with rising yields at home, the incentive to chase returns in the US is deteriorating and foreigner demand for US debt is abating with it
    • However, Primary dealers are still buyers, especially money market funds
      • When excess cash in the system needs to find a short-term place to be parked, it is done with the Fed’s reverse repo window. There, the market still has almost $1.5 trillion in dry powder to use in absorbing new issues from the Treasury
  • So, two of the largest buyers of US debt are stepping back – leaving a huge gap between higher anticipated supply and waning demand – once again, a catalyst to pressure prices lower (yields higher)
Related tags: Interest Rates

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI . StoneX is a trading name of StoneX Financial Ltd (“SFL”). SFL is registered in England and Wales, Company No. 5616586. SFL is authorized and regulated by the Financial Conduct Authority [FRN 446717] to provide to professional and eligible customers including: arrangement, execution and, where required, clearing derivative transactions in exchange traded futures and options. SFL is also authorised to engage in the arrangement and execution of transactions in certain OTC products, certain securities trading, precious metals trading and payment services to eligible customers. SFL is authorised & regulated by the Financial Conduct Authority under the Payment Services Regulations 2017 for the provision of payment services. SFL is a category 1 ring-dealing member of the London Metal Exchange. In addition SFL also engages in other physically delivered commodities business and other general business activities which are unregulated and not required to be authorised by the Financial Conduct Authority. StoneX Group Inc. acts as agent for SFL in New York with respect to its payments services business. StoneX APAC Pte. Ltd. acts as agent for SFL in Singapore with respect to its payments services business. ‘StoneX’ is the trade name used by StoneX Group Inc. and all its associated entities and subsidiaries.


Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. Past performance of any futures or option is not indicative of future success. Indicators are not a trading system and are not published as a specific trade recommendation. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.


© 2023 StoneX Group Inc. All Rights Reserved.

Discover more insights

Our subscribers have access to comprehensive market analysis from StoneX spanning commodities, equities, currencies and more.
See why StoneX is a partner of choice

Let’s get connected

To learn more about how our customized financial solutions can help you stay one step ahead in the global markets, contact our team today.

Select your Location

Contact us


By submitting this form, you are sending StoneX Group Inc. and its subsidiaries your personal information to be used for marketing purposes. View our  Privacy policy  to learn more.

If you're an existing customer, please direct any inquiries to your StoneX sales team.