Rates Spark: Save The Taper

The fate of a September tapering announcement hangs by a thread. Only a bumper payroll number today can save it. Markets are increasingly pessimistic. But it helps to keep system risk remarkably (and probably anomalously) low. The coming weeks will see a spike in issuance that skews rates higher and means a post-payroll rally is likely to be sold into.

System risk is on the floor, which is a risk in itself

We discuss here the notion that this marketplace is not attaching much value to the price of risk.

The simplest example is the 3-month USD Libor at below 12bp, practically at a record low, and with a record low bank spread element. This is a reflection of the comfort blanket of liquidity that has enveloped the marketplace. While this is comforting and leads to exceptional funding conditions, it also poses risks as the taper actually takes hold when it does. That process does not need to be a drama, and likely won't be, but at some point, risk will have to be priced more appropriately, and getting from here to there is likely to be painful (total returns painful, that is, for fixed income).

Tapering and the end of the debt ceilling drama should push Libor back up

(Click on image to enlarge)

Refinitiv, ING

A dovish Powell and deterioration in economic data is priced in…

Fed chair Jerome Powell’s cautious tone and the continued decline in US economic surprises are well accepted facts.

So much so that we doubt their relevance in driving future moves in US Treasury yields. As we have discussed, the divergence between USD and EUR rates this week is striking, and a sign that investors have largely priced out the odds of a September tapering announcement. In addition to Powell’s dovish communication at Jackson Hole, we think a key reason is that expectations for today’s payroll number has been pared back.

The risk scenario is one where a high payroll figure forces the market to rethink the odds of tapering

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Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any ...

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