The Fed’s lack of urgency to tighten policy, as espoused in the FOMC minutes released yesterday morning have helped support a bid tone for bond markets.
US rates are down slightly across the curve, including a 1.5bps fall for the 10-year rate to 1.53%.
New York Fed President Dudley was in the headlines again, providing some Q&A after a speech. As the indicators suggest, Q3 GDP “will be quite stronger” than 1H, but he added that he puts less weight on GDP than the labour market.
Nevertheless a strong Q3 would “probably push you in the direction of being more inclined to tighten policy. But not necessarily”. That was hardly a ringing endorsement of an imminent rate hike and US yields nudged a little lower after Dudley’s talk.
Former Fed Chair Greenspan (remember him?) was also on the wires. He forecast that interest rates will begin rising soon, perhaps rapidly. He also repeated his previously-voiced concern that the U.S. economy was headed toward a period of stagflation – a period of low growth and high inflation. Enough said.
In local trading yesterday, there was slight bias to lower yields, based on offshore moves. The 2-year swap rate closed down 2bps to 1.94, a record low. The 10-year rate fell by 2bps to 2.39%. The government’s $150m tender of 2025 bonds was well received with bids totalling $720m. That bond closed the day 2.5bps lower at 2.015%
Today the economic calendar is very light, with only NZ net migration data of some interest and nothing worth mentioning on the international calendar.
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Jason Wong is on the BNZ Research team. All its research is available here.
1 Comments
There is a fair bit of controversy with regard to the cost of banks' borrowing money overseas. One day swaps are up, and the next day they're down. I suspect this may be part and parcel of the concerted effort by central banks worldwide to manage expectations. From a cynical perspective one can easily understand how a confused, panicky population of investors would be easier to manipulate than a well informed, well balanced population would be. From a pragmatic perspective the realization that deflationary forces are in full swing, and their consequences on debt, are all but inevitable, as is the common knowledge that the forces of central bank narrative will prevail and save the day. And so we go on swaying, much like a school of fish under attack.
However, there are fundamentals no amount of spin can disguise or alter, and the astute investor would be wise to follow these. One of those fundamentals is LIBOR, and another is the amount of worldwide debt tied to it. The fact that LIBOR has increased steadily over the past few months, to the sum of about 80 basis points, coupled with the fact that at least US $28 trillion of debt is tied to it, has largely been ignored by the talking heads of info-media. This debt is pinned above LIBOR by a few tens of basis points, say 20 or 30, and sometimes as much as a few hundred basis points, and as LIBOR increases, so does the cost of servicing this debt. This amounts to a subliminal monetary policy tightening at a time when the "Generals of Inflation" are waging all out war on the forces of deflation using NIRP. The cynic in me thinks this may be by design (Expectation Management!) and the pragmatic in me thinks there may be factors ameliorating this effect, and hence it is being neglected.
But then again, why not mention it to the greater public? ...to keep the bliss going...? Unfortunately, I am not knowledgeable enough to discern further. Anyone can help with this idea?
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