Bonds: Nomura economist sees 10-year Gilt yield at 2.5% by year end
These were the movements in some of the most widely followed 10-year sovereign bond yields:
US: 2.72% (+2bp)
UK: 1.51% (+5bp)
Germany: 0.69% (+2bp)
France: 0.96% (+1bp)
Spain: 1.42% (+2bp)
Italy: 2.02% (+0bp)
Portugal: 1.94% (+0bp)
Greece: 3.69% (+5bp)
Japan: 0.08% (+1bp)
The Federal Reserve maintained the interest rate target unchanged at the range of 1.25%-1.50% overnight and upgraded its inflation outlook, in line with analyst expectations.
A statement from the Federal Open Market Committee stated that “the committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate”.
The probability of a March meeting jumped to 99%, based on bond futures trades.
“Fed policymakers sounded somewhat more upbeat than previous statements,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange. “Officials noted that inflation is expected to move up this year and importantly, dropped language from their statement saying they expect inflation to remain below its 2% target in the near term.”
“While bond markets seem to continue to reflect the increasing likelihood of a more aggressive pace of Fed interest rate increases this year, currencies, particularly the dollar, continue to ignore that scenario,” Esiner added.
The US dollar rebounded on the Fed decision, yet the recovery remained short-lived. The US dollar index was flat at 89.15 in the Asia session.
Chris Weston, market analyst at IG, noted that most of the selling took place in the 5 and 7-year part of the curve. “Naturally, the US 10-year Treasury has caught the attention of most, with yields pushing into 2.75% (+4bp on the day) and the highest since April 2014, although the bulls have waded in and yields are back to 2.71%. [There are] signs of sell the rumour, buy the fact here” he added.
The US 30-year yield consolidated near 2.95%, down from 2.98% reached after the Fed statement.
For Cameron Crise, macro strategist for Bloomberg, the break of the long-term downtrend in yields “doesn’t mean it will be a one-way train”. He highlights that “10-year yields are nearly three standard deviations above their one-year moving average” and argues that “the last time that happened was the end of 2016 – which wasn’t exactly a great time to sell bonds”.
Moving forward, investors will shift their focus toward the US jobs data. Released on Wednesday, the ADP employment report showed that the US economy added 234K new non-farm jobs in January, beating the analyst estimates of 185K. Previous month’s read was revised higher to 250K from 242K.
On Friday, the change in nonfarm payrolls is seen at 180K versus 148K printed a month earlier.
In the UK, the yield on 10-year gilt climbed 5bps to 1.51%.
Due for release on Thursday, the UK manufacturing PMI may have advanced from 56.3 to 56.5 in January, according to the consensus of analyst expectations. Construction PMI data is due on Friday.
Michael Hewson, chief market analyst at CMC Markets, notes that “the resilience of the UK economy in Q4 has been one of the more surprising aspects following the Brexit vote. In particular, the manufacturing sector has outperformed with activity at multi-year highs”.
Yet, he questions, “will this upbeat tone continue in 2018 with this week’s manufacturing and construction PMIs, and how badly will the Carillion story impact construction?”
George Buckley, an economist at Nomura agrees that “data surprises have been on the upside relative to consensus expectations”.
He expects four BoE rate rises before inflation returns to its 2% target, and forecasts that the two-year gilt will advance to 1.4% in the final quarter of this year, with 10-year paper at 2.5%.
In the euro-area, the inflation estimates for January were in line with expectations. Eurozone yields were a touch higher on Wednesday. German 10-year yield advanced 2bps to 1.69%, French 10-year yield closed up by 1bp at 0.96%
Eurozone final manufacturing PMI data for January are due on Thursday. The latest figures are expected to be in line with preliminary release.
France will sell 0.75% 2028 bonds on 1 February.
By Ipek Ozkardeskaya