Group Economics
Daily Insight
Macro & Financial Markets Research Nick Kounis & Maritza Cabezas
Bond yields to fall further
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13 October 2015 • • •
Government bond yields to fall further in the near term on Fed delay and more ECB QE ECB not ready to step up QE in October, but we think a December move is still likely Fed officials signal some wriggle room on 2015 rate hike view, setting scene for 2016 move
Changes to our bond yield forecasts
Fed funds futures: probability of rate hike
We expect government bond yields to fall further on both sides of the Atlantic in the near term and to rise more slowly during the course of next year. We see 10y US Treasury yields at 1.9% at year end and 2.6% by the end of next year (previously 2.3% and 2.7%, respectively). Meanwhile, we expect 10y Bund yields to decline to 0.4% by year end before rising to 1% by the end of next year (previously 0.5% and 1.4%). Fed delay, ECB QE plus to support bonds The change to our bond yield forecasts follows changes to our monetary policy calls last week. We expect the Fed to delay raising
%
100 75.3
80 62 60
92.8
65.8
48.6 38.8
40 20
79.3
85.5 88.5
10
0 Oct Dec-15 Jan
Mar
Apr
Jun
Jul
Sep
Nov Dec-16
interest rates until 2016, with our base case now for a June lift-off compared to December 2015 previously. Given that markets are
Source: Bloomberg
still pricing in some probability of a rate hike over the next few months (see chart), a delay should see some further pricing out.
Fed’s Vice Chairman Fischer in no hurry for rate hike
This should be supportive for Treasuries. In addition, we expect
Meanwhile, Fed officials continue to signal that a 2015 hike is their
the ECB to extend its asset purchases beyond September 2016.
base case, but are also giving themselves wiggle room to delay to
We had already expected the ECB to raise the level of its monthly
2016 by stressing the increased uncertainty. On Sunday Fed Vice
purchases (by EUR 20bn a month taking the total to EUR 80bn
Chair Stanley Fischer noted, during the Group of Thirty Banking
p/m). A stepping up and extension of QE should be a supportive
Seminar in Peru, that ‘…more time is needed to appraise recent
factor for Bunds in the near term.
developments
in
the
global
economy
before
beginning
normalization of interest rates’. Fischer said that ‘more focus on The changes reflect downside risks to global growth from China
foreign economic developments in recent FOMC statements was
and other emerging markets, low commodity prices and a
natural given the increasing influence these had on the US
generally subdued inflation outlook. The Fed’s delay will also put
economy, both through imports and exports and capital account
upward pressure on the euro, forcing the ECB to react.
developments’. According to the Vice Chair, the rate hike this year ‘…was premised on the assumption of continued solid economic
ECB is not yet ready to go in October
growth and further improvement in the labour market, which are
Commentary from ECB and Fed officials over recent days
key factors in supporting our expectation that inflation will rise to
suggests they are keeping their options open for now. For
our 2% objective’.
instance, Executive Board member Benoit Coeure said that it was ‘premature to discuss’ more QE, though the Governing Council
Fed’s Dudley to discuss appropriate level of interest rates
needed ‘to be ready’ to act if necessary. Given that the ECB
FOMC participants are quite divided on the timing and path of rate
already projected inflation below its medium term objective in
hikes. The FOMC’s communication has been somewhat confusing.
September, and the euro is already above the level it assumed
The tone of FOMC participants in upcoming speeches will be
then (1.136 versus 1.10) the central bank’s procrastination could
critical to assess whether the Fed’s view of the timing for the first
be considered as complacent. Though it seems that the Governing
rate hike is shifting. The influential President of the New York Fed,
Council wants to see more data to get visibility in to what is
Bill Dudley, a voting member, will speak on Thursday about
happening in emerging economies and commodity markets.
monetary policy.