While lower energy prices are a boon for U.S. consumers, they have reduced inflation expectations, which makes it more hard for the Fed to meet its 2% target.
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Investors demand additional compensation for holding riskier bonds those of corporations or government entities that are less likely than, say, the U.S. Treasury, to pay their debts.
Yields on benchmark 10-year Treasury notes are hovering around 2.2%.
In defence of the Reserve Bank, governor Lesetja Kganyago said on August 11 that there were conflicting views about the way the central bank should react to a change in US interest rates: pre-emptively or reactively.
“The outlook for sterling is stable with the currency being sheltered from these concerns”.
As a result, the fresh rhetoric coming out of the BoE/Fed may largely dictate price action in the week ahead as market participants continue to weigh the outlook for monetary policy. Now with the Fed planning to shift gears, investors are concerned whether these markets can hold up.
More than stocks, there is a link step relationship between rising interest rates and bond prices, often challenging the belief that bonds are safer than stocks.
Declines in shares of Chevron and those of Exxon Mobil, down 2.5% and 1.6% respectively, led the Dow lower. The rationale is that bond yields have been artificially depressed by the Fed’s monetary stimulus, and they need to rise as part of the process of normalization with reduced support from the central bank. Money managers and traders have been forced to buy Treasury bonds to cover their soured bets, and the purchases have contributed to the decline in bond yields. Kostin said in the note that was issued before Wednesday’s Fed minutes release that he has been surprised by the number of questions from clients asking if a U.S. recession is likely in 2016. For those who think the central bank is set to begin squeezing monetary policy at the September FOMC meeting, the 2-year yield is one of the smoking guns that support such forecasts.
“Risk-off sentiment has been strong over the past couple of weeks and supporting sovereign debt”, said Tomohisa Fujiki, head of interest-rate strategy for Japan at BNP Paribas SA in Tokyo.
The local unit yesterday touched 12.9761 against the US dollar, its lowest level since December 2001 and was trading at 12.9627 at 6pm. The Fed could instead act to keep the growth in nominal spending – the total amount of dollars being spent each year on consumption and investment – at a fixed percentage each year.
Crude oil prices were near their lowest in over six years.
The level suggests that investors expect the U.S. inflation rate to be running at an annualized 1.57% on average within a decade. Earlier this month, the MPC voted 8-1 in favor of keeping the rates constant.
The yield on the 30-year bond TMUBMUSD30Y, +0.07% shaved off 6.1 basis points to 2.758%, its lowest level since April 30.
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Concern that overseas economies are flagging may explain the downbeat bias, after China devalued its currency last week, Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, said in an interview. “Investors are seeing a considerably slow pace of Fed rate rises after the first one likely next month, and even the possibility of no further hikes for quite some time“.
