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Economic analysts and markets view the rising tide of US Government debt differently. US curves steepen. Economists see four Fed hikes in 2018, markets now less than three

Bonds
Economic analysts and markets view the rising tide of US Government debt differently. US curves steepen. Economists see four Fed hikes in 2018, markets now less than three

By Jason Wong

Friday was another choppy day for equity markets, although the S&P500 managed to end on a positive note. 

US Treasury yields nudged higher, while the NZD pushed higher.

Equity market volatility continued on Friday, with US stocks trading within a 4% range and ending on the positive side of the ledger (+1.5% for the S&P500) while the VIX index traded a 28-41 range and closed the week at 29.  There wasn’t much on the economic calendar, with the market wobbles reflecting a continuation of fear, or not, that the big bull run for equities has ended.

President Trump signed a two-year Budget agreement that boosts federal spending by $300 bln, temporarily finances the government through to 23 March, and suspends the debt ceiling for a year.  Economists said that it added about 0.4 percentage points to growth this year, at a time when the labour market is already tight, thereby adding to inflationary pressure and the case for the Fed to consider four rather than three rate hikes this year. 

However, that wasn’t how the market traded, with the probability of three rate hikes for the coming year reduced further and the 2-year Treasury rate down 3bps to 2.07% – the short end of the curve being sensitive to the turbulence being seen in the equity market and some pondering about how the Fed might react to the increased market volatility. 

There was a notable steepening of the curve, with the 10-year rate ending the day at 2.85%, up 3 bps, with one eye on the increased fiscal deficit and extra government borrowing that will ensue.  Still, there was evidence that equity market volatility was a factor in the session, as the 10-year rate traded a wide 2.78-2.86% range, with yields highly correlated to the intra-day S&P500 moves.


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