Since Election Day, the focus in the U.S. Treasury (UST) market has been essentially domestic-driven. In other words, market participants have been setting their sights on potential fiscal policy developments and, of course, the latest actions from the Federal Reserve (Fed).
However, as the calendar turned to summer, investors were greeted with a new twist for Treasuries: more-hawkish-than-expected rhetoric coming from other developed markets’ central banks, elevating global bond yields in the process. The question that lies ahead on the rate front is whether words become deeds; if so, the fixed income arena could be in for a case of summertime blues.
Two of the more noteworthy developments from the global central bank perspective involved the European Central Bank (ECB) and the Bank of Canada (BOC), each occurring in just the last few weeks. The genesis was at an ECB forum in Sintra, Portugal, where President Draghi made remarks that the bond market viewed as being on the hawkish side.
Although the ECB tried to walk back the comments, stating they were misinterpreted, the damage was done, and yields nevertheless finished higher. Interestingly, the FOMC minutes released early in July were a nonevent, but the ECB minutes were a different story, as the headlines stated that policy makers “discussed removing the easing biases in their policy communication,” specifically on their Quantitative Easing (QE) program. These news events were accompanied by earlier comments from BOC president Poloz that intimated that Canadian policy makers may be considering a rate hike at one of their upcoming meetings.
Unexpected shift in tone
Needless to say, the shift in tone was not expected in the global bond markets. Continue Reading…