Daily Commentary BY THE CURVE TEAM –

Supply and Demand Dynamics Set to Impact Long Rates

17th of January, 2018

As the US returns from the long weekend all the chatter is around the collapse in Crypto currencies and the stalling of the equity surge, which we have seen since the start of the year. Look a little deeper and the talk in the bond markets is where the focus should be.

Crypto currencies were hammered again, led by a 20% fall in Bitcoin overnight as the threat of regulatory oversight continues to weigh on the sector. Meanwhile US equities, fresh from setting new record highs yet again early in the session, have performed an about face and closed the session lower.

While both of those stories make for interesting reading, it is the ongoing developments in the bond market that continue to simmer away in the background that warrant closer attention.

ECB chatter once again made the airwaves with Jen Weidmann reiterating comments from earlier in the week around the likelihood of bond buying to cease this year. His colleague on the ECB governing council Francois Villeroy de Galhau, was also out saying that “The only question is how long it will take to meet our target” before warning that the rampant rise in the EUR could have implications for the timing of any change.

While the ECB’s balance sheet tapering start date is still in question, the FOMC’s ongoing tapering is coming at a time when the supply of bonds is about to surge according to Deutsche bank.

According to their analysis, the supply of bonds hitting the market is set to more than double over the next few years (see chart) at the same time that demand from the Fed continued to fade. With US 10’s breaking out of a 30 year downtrend, the fall in demand at the same time as a surge in supply, could put further upwards pressure on longer bond rates.

Looking to the day ahead and we have consumer confidence for January and lending data for November both due out today.

David Flanagan

Director - Interest Rate Markets