Repricing central bank policy
- Markets have repriced following a round of dovish comments
- Long-term yield components like inflation expectations and term premia are still very low by historical standards
- Curvature should be considered in the context of duration optimisation
- Keep an eye on US real yields as a trigger for capital flows
Policy expectations took a big hit in December
Fears of a stronger-than-anticipated global economic slowdown have recently seen central banks’ wording grow more cautious. In particular, the level of attention paid to financial conditions has risen.
As a result, we’ve witnessed a spectacular re-pricing of policy expectations: The US Federal Reserve (Fed) Funds curve has flattened considerably with 20 December 2018 futures rallying by 40 ticks over the past six months. Moreover, expectations of a European Central Bank (ECB) hike have been scaled back by almost eight months. The Eonia curve currently does not imply the initial 10 basis point (bp) hike before summer 2020.
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