This week’s rates volatility brought a stark reminder about how unpredictable and confusing the primary market can be. The sharp rise in government bond yields across the board on Wednesday was just a hint of what may come that could damage borrowers’ funding ambitions.
Rates were stable on Thursday, led predominantly by a drop in 10 year US Treasury yields of around 8bp. However, the yield remained above 4.5%. Clearly, the belief is still that dollar rates will stay higher for longer compared to just a few months ago when such an opinion was regarded as contrarian.
The nervousness was evident when Minneapolis Fed president Neel Kashkari said on Tuesday that any rate cut should only come before inflation is completely contained.
Kashkari, thought of by some as a “super hawk” is not a voting member of the Federal Open Markets Committee, but market participants still wanted to hear to what he had to say. Indeed, he even suggested that a rate increase may even be on the table.
Meanwhile, Japanese rates continue to rise, adding to concerns that they are also propping up govvie yields in other parts of the world.
Sure, JGBs are still low comparatively, but the 35bp or so jump in the 10 year yield over the past three months is a whopping 50% increase. With the weak yen proving an inflation headache for the central bank, market participants appear to be expecting a further move higher in yen rates.
Moreover, despite next week’s anticipated rate cut by the ECB deemed all but certain, its future cuts are also now less certain.
All of that can only mean more volatility ahead, especially with upcoming elections in many parts of the world adding more risks to deal execution.
Issuers should be flexible and consider accelerating their funding while conditions are still favourable. All the signs point to tougher markets ahead.