Bonds: 'Bull steepening' in Treasury yield curve after March FOMC
By Alexander Bueso
Date: Wednesday 21 Mar 2018
(ShareCast News) - These were the movements in some of the most-widely followed 10-year sovereign bond yields:
US: 2.88% (-1bp)
UK: 1.53% (+4bp)
Germany: 0.59% (+1bp)
France: 0.83% (+0bp)
Spain: 1.34% (+3bp)
Italy: 1.93% (+4bp)
Portugal: 1.76% (+3bp)
Greece: 4.22% (+3bp)
Japan: 0.04% (+0bp)
Gilts underperformed by a wide margin, as Sterling pushed back towards its pre-referendum highs against the US dollar ahead of Thursday's Monetary Policy Committee meeting and rate decision.
As expected, following two days of deliberations rate-setters at the US Federal Reserve hiked the target range for their benchmark interest rate by 25 basis points, to between 1.50% and 1.75%.
They also nudged higher their projections for interest rate increases in 2019 and 2020 and - perhaps unexpectedly - that for the Fed funds rate over the longer term, the so-called 'r-star', from 2.8% to 2.9%.
Initial market commentary appeared to interpret the Fed's post-meeting communique and, especially, their projections, as a bit more hawkish than expected, but that later seemed to morph to a verdict of 'more hawkish, but less so than expected'.
Reflecting that shift perhaps, after an initial move higher, yields retraced their gains and then fell back, with the policy-sensitive two-year yield four basis points lower at 2.31% roughly an hour after the all Street close.
To take note of perhaps, in the background there was some 'market chatter' to be heard regarding Chinese preparations of retaliatory tariffs on US goods produced in areas of the country that might be politically sensitive for the Trump administration.
Back on the subject of Wednesday night's FOMC, and towards one end of the spectrum of analyst opinion, Michael Pearce at Capital Economics said: "Fed officials now anticipate a (very modest) overshoot in inflation over the next few years, the first time they have done so since they began publishing economic projections in 2007.
"[...] While the median forecast for this year remained three rate hikes, the number of officials anticipating four rate hikes doubled to six."
However, in a research report sent to clients he then went on to add: "Once the fiscal boost fades and job growth slows, we expect economic growth will fall below trend, prompting the Fed to begin cutting rates again in 2020, a strongly non-consensus call."
For his part, Marvin Loh at BNY Mellon commented: "Our view is that the FOMC wanted to sound hawkish and tried to do so in the least disruptive manner possible. The 2018 dots did not change, although they gave themselves optionality in that it would take only one voter moving from three hikes to four in order to push the median higher.
"While the FOMC reports the median results of its votes, it is worth noting that the average for 2018 was 14 bps higher versus the December meeting.
"In looking at the 2018 dots dispersion, there were two contributors who felt only two hikes were likely this year."
As for new Fed chair Jerome Powell's answers during the Q&A session following the rate announcement, some market commentators highlighted his remark that policy-makers's so-called 'dot-plot' projections might rise, or they could fall.
Powell himself also appeared to emphasise that "we're always going to be seeking 2% inflation".
At one point, he also indicated that "[we are] trying to take a middle ground on rates".
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