Japanese bonds join the global rally with the curve bull flattening
Markets
US investors return from the long President’s weekend with future markets this morning suggesting that they’ll pick up where they left on Friday. Benign January CPI numbers extended a rally in US Treasuries with the front end (2-yr) at risk of giving away key support at 3.4%. The US 10-yr yield is drifting south to the psychological 4% mark. US money markets suggest more confidence that the Federal Reserve will have leeway to lower its benchmark rate from 3.5%-3.75% to 2.75%-3% by year-end. Today’s thin US eco calendar (weekly ADP numbers and empire manufacturing survey) likely offers little counter-weight to the core bond rally. Especially if risk sentiment hits another snag like equity futures currently suggest. We’ll scan speeches by Fed governors searching for clues about a shift in sentiment in the run-up to the March FOMC meeting. SF Fed Daly and board governor Barr speak during US trading hours. Daly has a more dovish profile and seems to put downside labour market risks ahead of upside inflation risks. She doesn’t vote on policy though this year. Barr has no real track record when it comes to public comments on monetary policy. His voting record is a mirror image of the (majority) consensus. He talks on AI and the labor market at the NY Association for Business Economics in what could be an interesting speech when it comes to interpreting the evolving risk balance around the Fed’s dual policy goals. We’d err on the dovish side of current market pricing given that the next Fed rate cut is only fully discounted by July.
Japanese bonds join the global rally this morning with the curve bull flattening. Yields fall by 4 bps (2-yr) to 8 bps (30-yr). The first auction of conventional JGB’s (5-yr) since the LDP’s huge election victory showed no signs of weakness. USD/JPY holds just below 153. Sterling loses ground (EUR/GBP 0.8720) following monthly labour market data. They show a further moderation in wage growth (4.2%). Weaker than expected employment growth from Q3 to Q4 2025 (+52k vs +108k expected) and January payrolls (-11k) point to a weakening labour market. The unemployment rate rose to 5.2% at the end of last year, only just below the post-pandemic peak of 5.3%. This morning’s numbers will add to March BoE rate cut bets following the close call (5-4) to hold rates unchanged in February. More hawkish members often referred (more evidence of) wage moderation as an important factor to switch sides. British inflation numbers (tomorrow) and retail sales (Friday) are still on tap later this week.
News and views
Australian central bank policymakers noted the economic outlook had “materially shifted” when it decided to raise rates as the first major monetary authority (excluding the outlier that is the Bank of Japan) earlier this month. The minutes of that meeting released this morning showed that the case was built on a judgment that part of the rise in inflationary pressures would persists amid greater capacity pressures. It flipped the balance of risks around the board’s both objectives of price stability and full employment. RBA members stopped short of flagging more hikes with the minutes stating that “It was not possible to have a high degree of confidence in any particular path for the cash rate”. But inflation in the updated forecast would remain above the mid-point of the 2-3% target range, which policymakers said, if proved true, would mean an extension to “the already long period during which underlying inflation had mostly been above the target range”. Both governor Bullock and deputy Hauser last week suggested further tightening if price pressures would become entrenched. The RBA next meets in March but May is probably more suitable in terms of another hike with Q1 inflation figures available by then.
Fed vice-chair for supervision Michelle Bowman yesterday announced plans to ease US bank capital requirements in an effort to boost mortgage lending. Bowman noted that mortgage activity over the past 15 years had migrated to non-banks, estimating banks’ share in the US mortgage market fell from 60% of home loan origination in 2008 to 35% in 2023. She blamed this shift on “over-calibration of the capital treatment for these activities”, which made “mortgage activities too costly for banks to engage”. Among the changes considered are adjusting the punitive 250% risk weighting for capital purposes as well as turning the standard capital calculation into a more variable one that may take into account parameters such as the size of the loan relative to property value.
Author
KBC Market Research Desk
KBC Bank
