Weekly Market Recap
The flat of the land
Week in review
- U.S. FOMC doubles pace of taper to US$30bn per month
- Australia business confidence drops to 11.5
- Australian unemployment rate falls to 4.5%
- Australia private sector credit
- RBA minutes of monetary policy meetings
- U.S. PCE deflator
Thought of the week
Policy normalisation from the U.S. Fed and elevated rates of inflation have not been enough to convince the bond market that longer dated bond yields should be higher. The spread between the 2-year and the 10-year has done a round trip since January even as many economic indicators have improved. The flatter yield curve may reflect that tighter policy will undermine the economic recovery. Alternatively, it could be that short-end yields are too high and that tightening happens much more slowly, resulting in a terminal interest rate that remains depressed compared to the state of the economy. A pattern that has repeated in the U.S. for a number of decades. However, it is likely that the steady rise in the cash rate and an inflation rate that settles somewhere closer to 3% than 2% once the distortions pass, will drive up yields on longer dated bonds. The result should be a steepening of the yield curve and favourable view on growth that supports risk assets.
Flatter yield curves can’t last
Yield on U.S. government bonds and spreads
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