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Monday, 26th February 2024
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Limited volatility as bond yields rise Back  
Strong economic growth combined with the rise in headline inflation rates following the surge in oil prices implies that central banks can be expected to continue tightening policy in the coming quarter.
Oliver Mangan
AIB Primary Dealer Unit

US: Fed funds: +50bps to 6.5%
10 Year bond yield: 6.25%
EU: ECB Repo: +25bps to 3.75%
10 Year bund yield: 5.45%
UK: Base rate: +50bps to 6.5%
10 Year gilt yield: 5.50%
Ireland: Irish German 10 Year yield spread: +20bps from +24bps at end Q1.

Comment: Strong economic growth combined with the rise in headline inflation rates following the surge in oil prices implies that central banks can be expected to continue tightening policy in the coming quarter. We look for rate hikes of 0.25-0.50 per cent in the US, Euroland and UK in Q2. Bond yields have fallen during the past two months following the announcement of a large debt buyback programme by the US Treasury. Further gains by bonds may be difficult to achieve in Q2 given the backdrop of strong economic growth and policy tightening by central banks. Thus we look for yields to rise by about 25bps.

Colin Hunt, Chief Economist
Goodbody Stockbrokers

US: Fed Funds: 6.50%
10 Year Bond: 6.10%
EU: ECB Repo: 3.75%
German Bund: 5.10%
UK: Gilt: 5.15%
Base Rate: 6.25%
Ireland: Irish 10 Year: 5.30%


Comment: The substantial fixed income rally of recent weeks has been supported by a continuing mix of pleasant oil market developments, equity market volatility and widening credit spreads. Given the pace of progress made, the market is likely to move to consolidation mode over the near-term and we expect to see limited price volatility on a three month horizon. Bonds are getting increasingly confident that central bankers will remain in pre-emptive mode and will move early on interest rates to stave off inflationary pressures. Our official interest rate forecasts reflect this belief.

Dermot O’Brien, Head of Economic Research
NCB

US: 10 year bond yield: 6.0
Fed Funds: 6.50
EU: ECB Repo: 4.00
10 year bund: 5.20
UK: UK base rate: 6.50
10 year gilt yield: 5.20
Ireland: Irish German 10 year yield spread: 5.40

Comment: On official rates, in light of the paucity of evidence that growth in the US economy is slowing, we expect the Fed to raise rates by 50 basis points by mid-year. Given its fixation on the euro, we expect that the ECB will move with the Fed - possibly anticipating the Fed decision by a week or so to keep up the appearance of independence. Further moves in the UK are likely despite sterling strength. Bond markets have substantially anticipated the current monetary policy round so we expect yields to be largely unchanged at mid-year from current levels.

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