DM Rates: Curves still biased towards steepening
Steeper curves.
Group Research - Econs, Eugene Leow22 Sep 2023
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Wrapping up the central banks’ actions and guidance thus far, there were several surprises to digest. On Thursday, the Fed held rates (as expected) but dialled up hawkishness via the dotplot. Meanwhile, both the BOE and the SNB opted to hold rates (against consensus expectations of a hike). In all three cases, significant curve steepening (2Y/10Y) took hold despite nuances in the respective central bank’s stance (the Fed seems more hawkish than the BOE and SNB).  A breakdown across the DM curves indicates that a surge in term premium or implied real rates was the common driver behind why long-end yields have been rising. This could well be explained by market participants finally digesting the point that interest rates could stay high (relative to the post-GFC years) for perhaps much longer than many had anticipated (beyond 1-2 years). Accordingly, there should not be that much of a discount between longer-tenor yields vis-à-vis shorter tenor ones. Using the US as a guide, 10Y yields have hit our technical target of 4.5% and the 2Y/10Y segment has steepened to -65bps (from -77bps a day before). From a curve perspective, we are not convinced that -65bps should be the ceiling. While further steepening may come from higher long-end yields (yet to find an equilibrium), a rethink of downside risks to the US/global economy could also drive short-end yields lower.  

 

Eugene Leow

Senior Rates Strategist - G3 & Asia
[email protected]

 

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