Macroscope | Why I’m betting on higher US bond prices
‘In ordinary times, low or even lower yields on US Treasuries amid tighter Fed policy might seem unthinkable, but we are not living in ordinary times’
In all likelihood the Federal Reserve will continue to tighten US monetary policy. In normal circumstances that might be expected to result in US yields ticking higher. But these aren’t normal times and market participants may have to recalibrate their expectations. Tighter monetary policy might not yield higher rates.
Friday’s US non-farm payroll (NFP) data for August may have underwhelmed, with the 156,000 rise coming in below market expectations of an 180,000 increase, but it probably won’t impact Fed thinking. As the UK’s Barclays Bank noted “the three-month average gain in non-farm employment is 185,000” which is a respectable enough figure.
It could be, as US firm Wells Fargo Securities argued on Friday, that the US “jobs gains are consistent with 2.5 per cent [US] economic growth in the third quarter, steady consumer spending and Fed policy as currently projected for a December rate hike.”
There’s also the likelihood of the Fed embarking on balance sheet reduction later this month.
But there’s a fly in the ointment for those expecting higher US yields and that is that there’s no compelling evidence that US inflation is on the rise.
July’s 1.4 per cent year on year rise in the Fed’s preferred inflation measurement, the core personal consumption expenditures index, released last Thursday, was the smallest increase since December 2015.