Longer-term and short-term interest rates during the first quarter exceeded year-end 2023 levels with the 10-year treasury increasing 0.31% to 4.20% at the end of the quarter, which was up from 3.49% at the end of the first quarter of 2023. Rates had decreased during the end of 2023, but an upward trend characterized the first quarter as the U.S. economy grew at its slowest pace in nearly two years.
Real (inflation adjusted) interest rates increased marginally during the first quarter with the 10-year TIP ending at 1.88%, up form 1.73% at the end of 2023. Real yields were up from the end of 2023, and break-even inflation increased by 0.16% to 2.32% over 10 years.
Rates rose dramatically in 2022 and through the first three quarters of 2023. Rates declined in the fourth quarter of 2023 in anticipation of a faster shift toward monetary policy easing but began an upward trend in the first quarter of 2024. Economic data provided a resilient outlook in the onset of 2024; however, stubbornly persistent inflation measures delayed much-anticipated rates cuts in the first quarter. Treasury rates mirrored H1 2023 levels, with the 2-year, 10-year, and 30-year Treasury yields rising 36, 32, and 14 basis points (bps) to 4.59%, 4.20%, and 4.34% respectively since the end of 2023.
Although treasury rates ended the quarter higher than the end of the first quarter of 2023, there was significant movement over the past twelve months. 10-year rates reached a low of 3.30% during the Silicon Valley banking crises and a maximum of almost 5% at the end of October 2023. Across the curve, rates ended the first quarter at about the mid-point of the trailing twelve-month range. Rates less than one year experienced the greatest spread to the end of the first quarter of 2023 due to shifts in the Federal Funds Rate, but the 1 through 10-year maturities moved toward Q1 2023 levels, albeit still exceeding the lowest rates experienced over the last twelve months.
Short-term and long-term AAA MMD rates exceeded year-end 2023 and Q1 2023 levels. The 10-year AAA MMD yield increased 23 basis points (bps) to 2.51% at the end of the first quarter, which was up from 2.27% at the end of the first quarter of 2023. The 1-year AAA MMD experienced the largest increase, ending the first quarter up 57 basis points compared to year end 2023 and 75 basis points compared to the first quarter of 2023. MMD rated peaked in October 2023 and fell throughout the remainder of 2023. MMD rates remained stagnant during the beginning of the first quarter of 2024, but began the ascend during the latter half of the first quarter of 2024 despite positive municipal fund flows (+25% since Q1 2023).
MMD rates rose dramatically in 2022 and leveled off through the first two quarters of 2023. Long-term MMD rates began to rise in the second half of 2023, peaked in October 2023, and began to revert to H1 2022 levels through the end of 2023 and into the first quarter of 2024. AAA MMD yields lagged in January due to elevated new issue supply (+25% YoY) and relatively high valuations coming out of the strongest Q4 in recent years. Nonetheless, February and March underperformed as the market could not digest a rising rate environment, elevated new issue supply, and expensive valuations. 2-year, 10-year, and 30-year AAA MMD yields rose 45, 23, and 26 basis points (bps) to 2.97%, 2.51%, and 3.68% respectively since the end of 2023.
Although MMD rates ended the quarter higher than the end of the first quarter of 2023, there was significant movement over the past twelve months. 10-year rates reached a low of 2.08% during April 2023 and a maximum of 3.61% at the end of October 2023. The 1-year AAA MMD rate experienced the greatest spread to the end of the first quarter of 2023 (+75 basis points), but the 2 through 10-year maturities moved toward Q1 2023 levels, albeit still exceeding the lowest rates experienced over the last twelve months.
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After going negative during the pandemic, real interest rates (as shown by the 10-year TIPS rate) increased substantially in 2022 In 2023, TIPS rates tracked nominal rates more closely, where they peaked in October 2023. Break-even inflation (the difference between the Treasury and TIP) declined slightly over 2023, particularly since the peak interest rates in October. Entering 2024, break even inflation started at 2.22% and ended the first quarter at 2.32%.
Treasury rates declined in the fourth quarter of 2023 in anticipation of a faster shift toward monetary policy easing, but began an upward trend in the first quarter of 2024 as stubbornly persistent inflation measures delayed much-anticipated rates cuts in the first quarter. At the end of 2023, the Fed Funds Futures market priced in 6 rates cuts by the end of 2024 to an implied rate of 3.59%. As of the end of the first quarter of 2024, the market priced in 3 rate cuts to an implied rate of 4.47%. Yields retraced much of the late-2023 rally and pushed expected policy easing farther into 2025.
U.S. economic growth slowed more than expected in the first quarter of 2024. GDP increased at a 1.6% annualized rate during the quarter, missing the 2.4% consensus estimate following strong growth of 3.4% to end 2023. Slowing GDP growth comes as headline inflation is up 3.8% and core inflation is up 3.5% since the first quarter of 2023. The Q1 2024 inflation reading is down significantly from its 9.0% peak in 2022, however it remains above policymakers’ long-term target of 2.0%. The cost of shelter increased 5.7% over the last year, accounting for over 60% of the total core CPI increase according to the Bureau of Labor Statistics. Other notable increases include motor vehicle insurance (+22.2%), medical care (+2.2%), recreation (+1.8%), and personal care (+4.2%).
