Dovish FOMC lowers rate path; Bonds storm ahead

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Dovish FOMC lowers rate path; Bonds storm ahead

Global core bonds eked out juicy gains today, with Bunds initially outperforming US Treasuries. A very strong Bund auction and unexpected monetary easing in Sweden were among the drivers for the Bund. After the European closure, the FOMC decided the drop the forward guidance. At the same time, they lowered economic & inflation forecasts and, most importantly, also their rate path (in a substantial way!). This suggests that while the lift-off may not be too far away, the Fed will tighten policy further out at a snail’s pace. US Treasuries jumped higher, the 5-yr outperforming. In a daily perspective, the German yield curve fell 2.4 bps (2-yr) to 8.5 bps (10-yr). On the US curve, the belly outperforming. The US 5-yr yield dropped 16.5 bps.

The eco calendar remains rather thin with only EMU Q4 labour costs (outdated), US initial jobless claims and the Philly Fed index. The Norwegian and Swiss central bank decide on rates and Fed’s Tarullo testifies to the Senate Banking Committee. The two-day EU Summit will start in Brussels and the ECB announces the results of the 3rd TLTRO. Finally on the supply front, France, Sweden and the US tap the market.

In the US, initial jobless claims are forecast to have picked up slightly in the week ending the 14th of March following a sharp drop in the week before. The consensus is looking for an increase from 289 000 to 293 000, but we believe that an upward surprise is not excluded following the sharp decline in the week before. The Philly Fed index is expected to show a limited rebound in March, from 5.2 to 7, after having dropped sharply in the last few months. It will be interesting to see whether the impact from poor weather conditions and probably the stronger dollar faded, which might push the index up again and therefore we believe that an upward surprise is not excluded.

The FOMC, as expected , dropped its “patient” guidance and thus may from June onwards at any meeting change its policy. It has become totally data-defendant. However, this hawkish element was overshadowed by the dovish “decisions”. The economic growth and inflation forecasts were lowered. Growth still stays above trend, while the inflation was especially lowered in 2015, but not in 2016/17. However, the projections of the expected rate path were considerably pushed lower. There will still be a lift-off in 2015 and probably another rate hike, but the Fed indicated that it will continue to go very slowly in 2016 and 2017. That of course bolstered riskier markets (equities), but also US Treasuries. For full coverage see our flash report.

The French treasury launches a new 3-yr OAT (0% Feb2018) and taps the on the run 5-yr OAT (0% May2020) & off the run 10-yr OAT (3% Apr2022) for a combined €7.5-8.5B. It’s quite unusual for the French debt agency to launch a 3-yr OAT (normally 2-yr OAT) but this has likely to do with eligibility criteria for the ECB’s Public Sector Purchase Programme. On the French curve, the May2020 OAT trades rich, but we’ve seen at previous EMU bond auctions that it doesn’t hamper demand. Overall, we expect again good demand. Additionally, France taps three inflation-linked bonds for €1-1.5B.

Overnight, most Asian stocks profit from yesterday’s dovish FOMC meeting. Japan (stronger yen) and China underperform. The US Note future trades somewhat off the post-FOMC high.

Today, eco calendar contains US weekly claims (downside risks) and Philly Fed Business Outlook (upside risks). As the Fed shifted in full data-dependence mode, the importance of eco data will grow for markets. Higher volatility can be expected as well. Technically, the next two days will be very important for US yields. After the Fed meeting, the 5-yr, 10-yr and 30-yr yields dropped just below important support level (previous neckline double bottom which turned into neckline double top). The technical picture is similar at all these tenors with key levels respectively 1.40%, 1.94% and 2.54% (see graph). A confirmed break lower is a technical signal that we’re heading back to the cycle lows. With our June rate hike call definitely at risk, chances of a break increased significantly. The US Note future already rose above the 128-04+/12+ resistance.

In Europe, the Bund reached a new intraday high confirming the bullish picture. Results of the third TLTRO operation won’t impact markets given the ECB’s QE-programme. Greece is not officially on the agenda of the EU Summit, but bilateral talks will undoubtedly be held. Greek bonds remain under pressure because of the stand-off between Germany/EU/EMU/IMF and Greece. Volatility in the periphery increased the past days (some spread widening), but with the ECB’s PSPP, the damage is contained for now. We expect QE purchases to cap upward potential of EMU bond yields.