| Bond ranges narrowed in Q3 |
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Bond forecasts and outcome
Market levels Q3 Forecasts
29 Sept. actual Hunt Mangan O’Brien
US Fed funds 6.50% 6.75% 6.75% 6.75%
10 year bond 5.83% 6.05% 6.20% 5.75%
EU ECB repo 4.50% 4.50% 4.75% 4.50%
10 year bund yield 5.23% 5.35% 5.45% 5.00%
UK Base rate 6.00% 6.00% 6.25% 6.25%
10 year gilt 5.20% 5.30% 5.40% 5.10%
IRL/GER 10 year spread: 23bps 22bps 22bps 20bps
Oliver Mangan, chief bond economist, Primary Dealer Unit, AIB Group Treasury.
US Fed funds 6.50%
10 Year bond 5.90%
ECB repo - 4.75%
10Y bund - 6.30%
BOE Base - 6.00%
10Y Gilt - 6.40%
IRL/GER 10 year spread: 20bps
Looking Back: A slowdown in the pace of economic growth saw monetary policy left unchanged in the US while the ECB responded to rising inflation in Euroland by hiking rates by 25bps. The Monetary Policy Committee in the UK voted 5:4 against hiking UK rates in both August and September. US bond yields moved somewhat lower in July as economic growth decelerated, while in Europe, bond markets continued to move in a narrow range during Q3. On the home front, Irish yield spreads tightened in to Germany reflecting the strong fiscal situation and associated favourable bond supply outlook.
Looking Forward: A deceleration in the pace of economic activity suggests that monetary policy will remain unchanged in the US over the balance of the year. The ECB, though, tends to focus solely on inflationary pressures and thus is likely to hike by another 25bps in Q4 given that the CPI rate remains above target. A lethargic UK economy suggests that the doves may continue to hold the upper hand at MPC meetings and rates will stay at 6%.
A lot of counteracting influences remain at play in bond markets - high oil prices, signs of decelerating economic growth, nervous equity markets, more stimulatory fiscal policies but - decreasing issuance. With not much action expected from central banks, it may well be that bond markets will continue to range trade over the final quarter of the year. Our forecasts reflect this expectation.
Colin Hunt, chief economist, Goodbody Stockbrokers
US Fed funds - 6.50%
10 Year bond - 6.05%
ECB repo - 5.00%
10Y bund - 5.20%
BOE Base - 6.00%
10Y Gilt - 5.10%
IRL/GER 10 year spread: 19 bps
Looking forward: Expect to see more of the same from the monetary authorities. Stability in US and UK rates seems to be on the cards out to the end of the year although we believe that the policy bias in both jurisdictions will be on the loose side of neutral by Christmas. The ECB will continue to tilt at windmills, spotting growth momentum where none exists, pushing interest rates upward again and expecting the world to respond to this horrendous monetary muddle by bidding the euro higher. While we retain our view that the best of global growth is well behind us, we believe that the US market has a lot of good news priced in. A few pre-election jitters on the fiscal rectitude front would be enough to push longer-dated yields a little north from here. In the UK, an enhanced credibility premium for the BOE should be supportive as should signs of slowing growth. Meanwhile in Europe, more sluggish domestic demand signals are bound to emerge from Euroland as the full impact of ECB tightening is felt. With economic activity set to disappoint and with a recovery for the euro a possibility for 2001, bunds could be the big play next year. |
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| Article appeared in the November 2000 issue.
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