Analysts at TD Securities explain that the global rates were marked by significant divergence in 2018, and while US rates rose significantly, other developed market rates barely moved.
Key Quotes
“Canadian rates were the second-worst performer in part due to BoC hikes and in part due to the resolution of NAFTA uncertainty. Much of the differential in rates can be explained by the divergence in central bank actions, as evidenced by the moves in the front end. While the Fed hiked three times in 2018 and is likely to hike again in December, the BoC hiked three times and the BoE hiked once in 2018. The ECB, RBA, RBNZ, and BOJ all kept rates unchanged throughout the year.”
“Heading into 2019, the market continues to expect the most from the Fed, penciling in a Fed funds rate of 2.8% at the end of 2019. Given our call for the neutral rate at 3%, we think this makes the market somewhat well-priced for Fed rate hikes. Even though we expect the Fed to hike 25bp more than the neutral rate, uncertainty about the reaction in risk assets may keep the market from pricing that outcome in.”
“We believe that the market is also under-pricing the pace of hikes in UK, Europe, Australia, and New Zealand. We look for 50bp and 40bp of hikes from the BOE and ECB, respectively, while the OIS curve is only pricing in 24bp and 10bp of hikes.”
“Meanwhile, we look 25bp of hikes from the RBA and RBNZ, with the market pricing in only 15bp for both. Thus we believe that global rates will not diverge all that much in 2019, especially in the front-end as other central banks catch-up to the normalization process.”
Share
