Fixed Income Update 25 Jan 2024
KBVS WEEKLY FIXED INCOME UPDATE
Thursday, 25 January 2024
Awaiting Clarity On The Fed Rate
The statement from the Fed's John Williams, asserting that the central bank is not currently discussing rate cuts, alongside Fed's Raphael Bostic's expectation of rate cuts occurring in 3Q23, significantly influenced the movement of UST yields last week. During the same period, housing market releases (building permits, housing starts, and existing home sales) played a pivotal role in shaping market sentiment, complemented by labor market releases (Initial Jobless Claims), and inflation expectations. Regionally, attention is focused on the outcomes of PBoC loan prime rate and the BoJ interest rate decision. Meanwhile, the M2 domestic money supply, which has increased by 3.5% YoY (previously 3.4% YoY), is garnering attention domestically.
Statements from Williams and Bostic, along with last week's US data releases, have fostered expectations for a potential restraint on Fed Rate cuts this year. This sentiment is reflected in the Fed Probabilities as of 20 Mar '24, where initially 90% of investors anticipated the occurrence of the first rate cut. However, as of 24 Jan '24, these expectations have decreased to 50%. Consequently, this has constrained the decline in short-term UST yields, while conversely, longer-term UST yields have experienced an ascent. Despite these dynamics, signals of UST yield curve normalization remain apparent.
Meanwhile, the increasing uncertainty surrounding the Fed Rate cut has led the global market to adopt a wait-and-see approach. Simultaneously, the yield spread between SUN10Y and the UST10Y has begun to narrow to 245.88 bps, down from 260.97 basis points at the beginning of 2024. This trend is influenced by the decline in short-term SUN yields, coupled with long-term SUN yields experiencing a more restrained increase compared to the rise in UST yields.
Regards,
Fikri C Permana - KBVS Research Team