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Repricing central bank policy

Key points

  • 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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