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8 Jan 2015
Long term UST yields likely to stay anchored in the short term – DBS
FXStreet (Barcelona) - The DBS Group Research Team notes that the uncertainty revolving the timing of the Fed rate hike and inflationary pressures muted, long term treasury yields still remain attractive relative to the other developed market counterparts, hence anticipate long term UST yields to stay anchored in the short-term.
Key Quotes
“The release of the Fed minutes last night did not unsettle the USD rates space. In fact, the minutes confirmed that Fed hikes are unlikely in 1Q, but Fed Funds futures have consistently been more dovish, pricing in a 25bps rate hike only in the September/October period. The market still does not think that Fed hikes are likely in 1H.”
“The reaction for USTs is similarly muted. 2Y UST yields are down marginally while 5Y yields stayed flat. Meanwhile, 10Y yields gave up half of its 6bps intraday gain to settle at 1.97%.”
“In any case, under the assumption that the Fed does not adjust its balance sheet, an increase of short-term USD rates need not necessarily translate into upward pressure on long-term UST yields. This is the conundrum faced by Greenspan during the previous rate hike cycle in 2004/06. Other factors, including inflation expectations and the relative attractiveness of USTs to their counterparts in the developed world play more important roles in the current environment.”
“With inflationary pressure (exacerbated by depressed oil prices) still muted and UST yields still very attractive relative to their developed market counterparts, longterm UST yields are likely to stay anchored in the short term.”
Key Quotes
“The release of the Fed minutes last night did not unsettle the USD rates space. In fact, the minutes confirmed that Fed hikes are unlikely in 1Q, but Fed Funds futures have consistently been more dovish, pricing in a 25bps rate hike only in the September/October period. The market still does not think that Fed hikes are likely in 1H.”
“The reaction for USTs is similarly muted. 2Y UST yields are down marginally while 5Y yields stayed flat. Meanwhile, 10Y yields gave up half of its 6bps intraday gain to settle at 1.97%.”
“In any case, under the assumption that the Fed does not adjust its balance sheet, an increase of short-term USD rates need not necessarily translate into upward pressure on long-term UST yields. This is the conundrum faced by Greenspan during the previous rate hike cycle in 2004/06. Other factors, including inflation expectations and the relative attractiveness of USTs to their counterparts in the developed world play more important roles in the current environment.”
“With inflationary pressure (exacerbated by depressed oil prices) still muted and UST yields still very attractive relative to their developed market counterparts, longterm UST yields are likely to stay anchored in the short term.”