Bond market yield curve flattening continues as US growth slows, as ECB’s Lagarde pushes back rate hike expectations

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A readjustment in traders and investors’ expectations about when central banks might raise their key interest rates amid an uncertain economic outlook continued to be reflected in bond markets on Thursday as yield curves flattened further on United States to United Kingdom and Australia.

The moves were particularly pronounced in the UK, where the spread between 5- and 30-year government debt yields flattened to the narrowest level since at least 2008, according to Tradeweb data. Meanwhile, US and Australian spreads were respectively at their narrowest levels since March and April 2020.

Although some central banks like Brazil and Mexico have already raised benchmark interest rates, investors expect a more comprehensive rate hike cycle as early as next year, even if growth appears to be slowing.

Data released Thursday showed US GDP growth slowed sharply to an annualized rate of 2% in the third quarter. Meanwhile, investors continued to integrate rate hikes from the European Central Bank, while rejecting President Christine Lagarde’s efforts to push back those expectations.

Read: ECB’s Lagarde pushes back interest rate hike expectations, but markets aren’t listening

“The overall flattening of the yield curve will remain thematic in the coming weeks,
as market participants adjust to the realities of a more hawkish international monetary stance, ”said Ian Lyngen, head of US rate strategy for BMO Capital Markets.

The measures come at a time of growing uncertainty about the strength of the economic recovery, “and there is more reassessment to be done, but it will not be in a straight line,” Lyngen said by phone Thursday. “It will be hectic. There will be moments of tactical refinement as we push flatter. ”

In the United States, the Treasury yield curve flattened ahead of the Federal Reserve’s policy decision next Wednesday, in which an announcement is expected to be made on cutting $ 120 billion in monthly bond purchases. Tapering, the first step before a rate hike, would normally tend to drive up long-term yields. Instead, long-term yields have fallen in recent days, with the 10- TMUBMUSD10Y,
1.606%
and 30-year rate TMUBMUSD30Y,
2.008%
recording their biggest single-day declines since July on Wednesday before rebounding on Thursday.

JPMorgan Chase & Co. strategists Marko Kolanovic and Bram Kaplan attributed Wednesday’s large moves in markets in part to large month-end rebalancing flows into bonds and out of equities, as well as media reports making fund statement closing steepening positions at a loss. Other analysts, however, have suggested that technical factors have less to do with movements than macro considerations.

“Bond yields are rising as traders reassess or continue to assess expectations for future central bank policy,” Lindsey Piegza, chief economist of Stifel Nicolaus & Co. wrote in an email.

“Some insist the pullout is a reflection of industry insiders grappling with the end of significant budget support driven by a strong recovery which in turn will lead to a more abbreviated timeline for reduced support. monetary, ”she said. “More likely, however, at least some investors are responding to not so transient and transient inflation levels and declining growth expectations.”

In the UK, the new chief economist of the Bank of England, Huw Pill, told the Financial Times in an interview published last week that inflation could rise to nearly or even exceed 5% in the coming months. . Even an unexpected slowdown in a UK inflation indicator was not enough to shake interest rate hike expectations last week.

On Thursday, Treasury yields remained higher overall, with the 5-year rate advancing faster than the 30-year rate. Meanwhile, US stock indexes rose, as strong corporate results continued to show. The S&P 500 SPX index,
+ 0.98%
and the Nasdaq Composite Index COMP,
+ 1.39%
each closed at record highs, up 0.98% and 1.39%, respectively. The Dow Industrials rose 0.68% to reach the third highest close in history.


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