• Market expectations that the FOMC will raise the federal funds target rate at its March meeting soared this week. The implied probability of a rate hike at the FOMC’s upcoming meeting climbed from approximately 40% just one week ago to as high as 86% late this week as both investor sentiment and global inflation data continued to firm.18 On Tuesday alone, three members of the FOMC spoke about the possibility that it may raise rates as soon as its mid-March meeting.1
  • Amid the broad rally, yields on the 2-year and 10-year Treasury notes climbed approximately 17 basis points and 16 basis points, respectively, this week.2
  • While investors have re-embraced the so-called reflation trade, a notable distinction is emerging. Markets appear to be preparing for higher inflation in the U.S. over the short term but have become increasingly sanguine about inflation over a longer period of time.
  • As the chart highlights, the spread between 10-year and 2-year breakeven inflation rates has been declining since late November 2016 and, today, it is inverted.3 This means that markets see inflation picking up in the short term (2-year inflation expectations) but continue to expect a moderation in inflation over the long term (10 years).

1 CNBC.com, http://cnb.cx/2lCsMFC.
2 U.S. Department of the Treasury, http://bit.ly/2lZqrrP.
3 Bloomberg, based on the spread between the 10-year and 2-year breakeven inflation rates.

The Alternative Thinking Week in Review market commentary and any accompanying data (“Market Commentary”) is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The Market Commentary is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such Market Commentary. The Market Commentary should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the Market Commentary or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.