Bond markets push rates up in the US and Europe off of lows; Fed's Bullard mirrors market thinking. Eyes on UK Brexit poll

By Jason Wong

The US bond market ended the week with an upward bias to rates, reversing some of the moves earlier in the week.

The US 10-year rate traded in a tight range on Friday and ended 3 bps higher at 1.61%, about 9 bps up from the intraday lows of Thursday.

It was a similar trend in other markets, with an upward bias to rates from record lows.  Germany’s 10-year rate didn’t spend much time in negative territory and is back at the whopping level of 0.02%, up 4 bps for the day.

On Friday, the Fed’s Bullard owned up to being the FOMC member whose “dot” portrayed only one more rate hike through to the end of 2018, making him the most dovish member.  He now believes that growth will remain modest, due to slow productivity growth and other factors, keeping inflation about where it is, requiring only one more rate hike over the next couple of years.

Bullard shouldn’t feel like an outlier, as his view closely aligns with the weighted average of millions of investors, ie. the market. He was also the only FOMC member that didn’t submit a long-term “dot” forecast, believing that the committee should scrap the dot plot picture.

Local trading on Friday was quiet, with a modest upward bias to rates, driven by offshore influences.  The 2-year swap rate ended the week at 2.27% and the 10-year rate was 2.755%.  The 2s-10s spread of circa 48 bps is the lowest in over a year.

While it’s a fairly quiet week ahead for economic data, the market will be closely watching the UK polls, with one eye on the referendum late in the week.  Rates would likely rally a lot further on a Brexit vote, while a win for Remain would likely see a retracement of the fall in yields seen over recent weeks.