Analysts at Westpac, notes that the US 10yr yields have traded a 2.84-2.92% range and there are few obvious catalysts that could provide impetus for a breach of the range anytime soon.
Key Quotes
“This week’s FOMC Minutes is one such risk event, however there is little expectation that it will reveal any significant vacillation in FOMC members’ view on the US economy or their current Fed Funds projections.”
“Powell’s speech at the Jackson Hole Symposium is also not expected to be controversial or used to significantly tweak Fed messaging. So a September rate hike remains largely factored-in and markets have ascribed around 50-50 odds of a second increase by year-end and a further one-and-a-half rate hikes in 2019.”
“In recent years, international uncertainty such as that mentioned above, might have prompted the Fed to re-assess the speed of rate hikes, if not the quantum. However, given current US inflation and growth outcomes and the fact that these have decoupled somewhat from global trends, the FOMC will have seen little need to shift its current thinking.”
“As a result, the US curve flattening trend has resumed, with the 2-10yr curve now only marginally off new cycle lows. Unless the Fed were to dramatically change course, we see little reason to expect the flattening impulse to dissipate and reverse. While the main curve driver remains the Fed’s cycle, and the apparent hawkishness of their projections (in contrast to the market, the Fed is projecting 3 hikes next year), in the near term there are other supportive influences.”
“CFTC data indicates that speculative investors have added to their already large UST short position, with 10yr futures shorts at new records and speculative shorts in the 5yr and 30yr contracts only fractionally away similar records. Should some of the risks evident in the global economy (Turkey, contagion, Brexit, Italian banks, China-US trade wars to name a few) escalate into a more sustained “risk off” thematic, then some of those positions could be squeezed such that yields fall and the curve continues to flatten. Even so, they remain risks, not clear drivers of price action near term. Hence, we would not expect a major market revaluation this week.”
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