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Wednesday, 17th April 2024
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Third quarter on currencies and bonds Back  
At the beginningof each quarter, Finance invites bond and currency market experts to give their outlook for the quarter and to predict the level of key indicators at the quarter end. Following on from last quarter’s predictions the analysts who gave predictions comment on their accuracy. The third quarter of this year began in July and will end on Friday 29th September. The following are the assessments for the current quarter.
Bonds: renewed vigour ahead

Colin Hunt, Chief Economist, Goodbody Stockbrokers

US Fed funds - 6.75%
10 Year bond - 6.05%
ECB repo - 4.50%
10Y bund - 5.35%
BOE Base - 6.00%
10Y Gilt - 5.30%
IRL/GER 10 year spread: 22 bps

Looking back: The forecasts were caught a little offside by unexpected activism at the ECB and stoicism at the Bank of England. The 0.50% move from Frankfurt was out of character and unwarranted by economic fundamentals. The euro had the lead hand here and I have to confess that its desire to explore new depths over the past quarter was surprising. In the UK, we have long-argued in favour of more policy restraint from the Bank of England. The big shock on UK rates was that the Bank is now prepared to wait for confirmation of the unfolding economic slowdown and does not feel compelled to respond to every passing sign of strong activity by hiking interest rates.

Looking forward: The anticipation of a turning point for the Anglo-Saxon interest rate cycle should be the big issue in the coming quarter. Despite gathering evidence of a slowdown in US economic activity, the Fed is expected to move rates higher by one notch in August. This will serve to underpin and enforce the easing of growth and should be supportive of short-dated interest rate contracts. We see little action in Treasuries on a near-term basis but gilts should outperform bunds as more silly talk about the Euroland growth explosion does the rounds. We are some way from the markets realising that ECB rates cannot safely move above 5%.

Oliver Mangan, Chief Bond Economist, Primary Dealer Unit, AIB Group Treasury.

US Fed funds +25bps 6.75%
10 Year bond +15bps 6.20%
ECB repo - +50bps 4.75%
10Y bund - +20bps 5.45%
BOE Base - +25bps 6.25%
10Y Gilt - +20bps 5.40%
IRL/GER 10 year spread: 22bps

Looking back: We expected official rates to rise by 25-50bps in Q2 because of rising inflationary pressures and a pick up in economic growth. In the event, the FED hiked by 50bps and the ECB by 75bps, although 25bps of the latter was technical. The surprise was in the UK where rates were left unchanged as sterling strength slowed the economy and dampened inflation. As expected, further gains by bonds proved difficult in Q2 against the backdrop of official rate hikes in the US and Euroland. Indeed yields edged higher for a while but finished the quarter largely unchanged.

Looking forward: In Q3, further rate increases are expected with rising oil prices putting upward pressure on inflation and economic growth likely to pick up momentum.Our forecasts look for rate hikes of 25-50bps in the US, Euroland and the UK. A key influence for bond markets will be the performance of the US economy. We expect to see signs of renewed vigour after a recent spell of slower growth. However, a lack of fresh supply because of growing budget surpluses should limit the resulting upward pressure on bond yields. Thus bonds are likely to contine moving in a narrow range.

Dermot O’Brien, Head of Economic Research, NCB


US Fed funds - 6.75%
10 Year bond - 5.75%
ECB repo - 4.5%
10Y bund - 5.00%
BOE Base - 6.25%
10Y Gilt - 5.10%
IRL/GER 10 year spread: 20bps

Looking back: As far as policy is concerned we were too pessimistic on the Bank of England, a bit optimistic on the ECB but right about the US Fed. Given the huge influence of developments in the States, the Fed was the important one to anticipate correctly. Thus, our 10-year yield forecasts were within a basis point or two of the outturn with the exception of that for Ireland. We had expected some tightening of the Irish/Germany yield spread but it remained stubbornly around 25 basis points.

Looking forward: We think the Fed will hike another 25 basis points in August. This should mainly be for insurance since we believe there is a good chance more evidence of moderate growth will be available by then. The ECB is also likely to resume raising rates in August and will probably do around 50 basis points by end-year. Though it has held rates since February, we think the Bank of England has one last shot in its locker. We remain bullish of bonds, despite higher rates. The end of the tightening cycle in the US should be a significant positive not just for treasuries but for European bonds as well. We stick with our belief that the strong fiscal position in Ireland will narrow the Irish/Germany spread.

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