By Kymberly Martin
The weaker US retail sales figures and plunge in equity markets helped drive down US Treasury rates.
The 10-year rate reached 1.98% at one stage, a 3-month low, before ending the day down 5 bps at 2.03%. The 2-year rate fell 4 bps to 0.85%.
It was only a matter of weeks ago that this yield was on a rising trend and reached 1.1%.
The fall since then is indicative of reduced expectations of Fed tightening over the coming year. Current Fed Fund futures have now priced in a rate of just 0.62% by December, suggesting that just 1 more rate hike is priced in for 2016, well down on the 4 rate hikes projected by the median FOMC member.
It will be interesting to see how this plays out in 2016. If the market is right, then US 10-year Treasury rates around 2% are probably about right.
However, if the FOMC is correct, core inflation picks up and 4 rate hikes are in store, then the 10-year rate would likely rise quite sharply from current levels, towards the 2.75% level.
New York Fed President Dudley gave a speech where he was rather dismissive of recent economic weakness, noting that the economic outlook hadn’t really changed since the December FOMC meeting. He took some comfort in stable core inflation, despite the fall in oil prices, but he did raise some concern that inflation expectations had been receding. The market-implied 5-year forward/5-year break even inflation rate has recently fallen to 1.6%, its lowest level since 1999. This inflation gauge is closely monitored by Fed officials. Of some comfort to Fed officials will be the fact that surveyed measures of household inflation expectations are holding up. The 5-10 year inflation expectations series of the University of Michigan survey actually edged up from 2.6% to 2.7%.
A similar interest rate trend has been seen in NZ, with falling rates evident.
Pricing over the past two weeks suggests that the probability of the RBNZ cutting interest rates has been rising. For example, OIS pricing currently suggests an 80% chance of a 25bp cut by September. At the start of the year the implied probability was closer to 36%.
NZ swap rates rose slightly on Friday by 1-1.5 bps, but today we are likely to see a fall on the back of the moves in the US.
Daily swap rates
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1 Comments
The market-implied 5-year forward/5-year break even inflation rate has recently fallen to 1.6%, its lowest level since 1999. This inflation gauge is closely monitored by Fed officials. Of some comfort to Fed officials will be the fact that surveyed measures of household inflation expectations are holding up. The 5-10 year inflation expectations series of the University of Michigan survey actually edged up from 2.6% to 2.7%.
As have TIPS yields until recently. But it is noticeable that one year Libor prints out at 1.1586%.
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