Investors realize that the era of low rates is definitely over


The bond market sell-off continued unabated yesterday. ECB and Fed minutes from last week investors are realizing that the era of low interest rates is definitely over. The US and EMU multiple yields have set new cycle highs or breached significant and long-standing technical levels. US investors were still thinking about the consequences of an accelerated balance sheet roll-off, steepening the curve sharply. The 2-year rate is blowing a little (-1.4 bp), but the longer maturities go up to 9 bp (30 years). 10-year yields closed north of 2.75%, bringing the 3.0% zone to the radar. Interestingly, the move was still more or less equally driven by higher real yields and inflation expectations. The latter suggests that the market still sees room for the Fed to further accelerate the pace of tightening. In Europe, the steepening trend was more modest the German 2-year rate gained 8.3 bps and the 30-year gained 11.9 bps. At 0.816%, the 10-year Bund yield surpassed the key 2018 high of 0.80%. The 2-year EMU swap hit the 2013 high of 0.78%! The sharp rise in interest rates, combined with persistent geopolitical tensions and growing doubts about growth (in China, but also elsewhere) has triggered a riskier repositioning on equity markets. US indices lost 1.19% (Dow) to 2.18% Nasdaq. Despite a broad upward trend in returns also for currencies other than USD, The king dollar this time took full advantage of its status as a safe haven. The DXY TW index broke through the 100 mark. EUR/USD failed to hold its opening gains (French election result) and closed at 1.0884. The yen underperformed again. USD/JPY failed to hit the high of 125.86 in 2015 (near 125.36).

This morning, there is no sign of a return to calm in the bond markets. US yields rise again by 3 to 4 basis points across the curve. Most Asian stock indices are trading in the red, with China being the exception. The Nikkei underperformed (-1.65%) despite the persistent weakness of the yen. the The Japanese Minister of Finance multiplies the verbal interventions as he said sudden currency movements are undesirable and the government will monitor currency movements vigilantly. The impact on the yen was limited (USD/JPY 125.45).

Today the US CPI release in March takes center stage. Headline inflation is expected to accelerate to 1.2% M/M and 8.4% Y/Y. For the basic measure, a rise of 0.5% M/M to 6.6% is expected. Headline inflation could be near the top. However, the persistent high pace of M/M price increases justifies the Fed’s red-alert anti-inflation mode. We therefore see no reason to expect a sharp correction in the current uptrend in (US) yields. European yields which have recently broken key levels (10-year swap and Bund north of 1.37% and 0.80% respectively, 2-year swap at 0.78%) also suggest that there is no no break before Thursday’s ECB meeting. On the foreign exchange markets, the dollar remains in pole position. EUR/USD is at risk of falling back to 1.0806 year-to-date lows. UK labor market data published this morning were close to expectations, but BRC’s retail sales were penalized by the pressure on British citizens’ disposable income (see below). EUR/GBP is hovering near the 0.8350 pivot with first strong support at 0.8307/0.8296.

News headlines

Benda, CNB policy maker mentioned Czech inflation has probably not yet fully reflected all the new external factors, suggesting that yesterday’s figure of 12.7%y/y is likely to rise further in the coming months. Benda expects strong price growth to persist longer than previously expected. A return to the 2% target could be delayed by six months until the end of 2023he said. Deputy Governor Nidetzky also commented on Monday’s CPI release. He thinks rates should be raised slightly in a response, outlining follow-up hikes as a “tune-up”. He is, however, aware of the consequences of the tightening on the economy and said that this must be taken into account in future decisions. The Czech koruna finished strong at EUR/CZK 24.43 on Monday.

The UK British Retail Consortium (BRC) reported a sharp drop in sales in March. Retail sales (comparable stores) fell 0.4% after rising 2.7% the previous month. Traders warn “clouds on the horizon”, BRC said, referring to higher prices reducing purchasing power and consumer confidence. The consortium sees little reason for optimism with the full impact of recent energy price hikes and national insurance changes yet to be felt by households. The cost of living crisis is in full swing.

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Leslie M. Gill