THIS (29 November) LETTER from HSBCs Steve Major is presented without further comment
The idiom “across the pond” generally refers to Brits and Americans viewing one another from either side of the Atlantic Ocean. The US economy is more than seven times the size of its UK counterpart, which normally justifies us spending more time looking at the world’s leading bond market.
Sometimes, however, the shoe can be on the other foot. Expectations for interest rates in the UK have recently appeared to lead those in the US. Short-dated UK yields were moving sharply higher weeks ahead of the US equivalents, which required the 22 September FOMC, and its hawkish turn, to propel them higher.
Since peaking at the beginning of November, UK short yields have fallen back, a result of the Bank of England appearing to delay the lift-off from practically zero interest rates, whilst the US equivalents have probed new highs for the year.
The flat UK yield curve is consistently reflecting the view that we are late in the cycle, that if and when rates do go up, they won’t get very far. Inverted curve slopes – that appear in money markets and further up the bond curves – tell us that increases in rates could even be a “mistake” that will later have to be reversed.
In both the UK and US it’s the highly interest-rate sensitive five-year maturity that has increased the most this year (Figure 1), in two waves: from January to March and September to now. What a contrast to the 30-year maturities which are not so far from where they started the year (shown by dotted lines in Figure 1).
…Bond yields have factored in the likelihood that rates will rise at some point next year. Most importantly, the long-ends of the major developed markets are resolute in their conviction that policy rates cannot rise too far.
Given the Bank of England doesn’t tend to hike in December, preferring to wait for the February forecasting round – and not forgetting Cshristmas is approaching – we probably have some time to consider the outlook for rates, on both sides of the pond.