There is little doubt that the general level of conviction in global debt markets is relatively low at this point in time. And yet we continue to move towards what one might describe as ‘normality’.
Curve views: Stability is unstable
There is little doubt that the general level of conviction in global debt markets is relatively low at this point in time. And yet we continue to move towards what one might describe as ‘normality’. By this we mean that there has been a fairly steady progression towards higher yields with the initiation of QE II in the US as the starting pistol for the move. Alongside this move we have seen a broad based steepening bias in US and EA 2/10s curves while only the UK yield curve has been broadly stable. In the meantime, the ultra long ends of yield curves saw an initial steepening bias in line with the implied risks surrounding the inflation outlook and QE but have since moved back towards levels that prevailed towards the middle of 2010.
We cannot really provide an update on the outlook for yield curves without taking into account the outlook for short term rates. This brings the looming FOMC meeting into focus although it seems highly unlikely that there will be any shift in the current $600 bln QE II target size. It seems clear that most Fed governors are happy with the idea of keeping the taps wide open to ensure the recovery and indeed this is hardly surprising in the context of the current inflation profile. The fact that the FOMC are specifically targeting a reduction in the unemployment rate alone suggests that a move away from the current extreme accommodation stance is a very long way off.