Bond markets absorb a lot of supply

A mixed week for equity prices post the release of minutes from the last meetings of the ECB and the Federal Reserve. Both sets of minutes suggest some form of continued tightening. The Federal Reserve is almost certain to raise interest rates at the next meeting and the ECB are likely to drop their easing bias at the next meeting. Equity markets have had the so-called “central bank put” to rely on over the past few years. That put is slowly being removed and this is bound to cause some volatility in equity and bond prices.

The expectation amongst members within the Fed and the ECB is that economic growth is more resilient than it has been and with some signs that inflation is starting to take hold this is the time to take the gas of the pedal, if not apply the brakes just yet.

On the data front average, UK earnings grew year on year at 2.5%, in line with expectations however with inflation running at 3% consumers are still being squeezed. GDP growth in the final quarter of last year was revised downwards slightly from 0.5% to 0.4%, the positives were that investment growth remained strong.

The flash US Purchasing Manager Survey data for the month of February came in materially ahead of expectations. This, along with the minutes from the last meeting, is leading the markets to look at the possibility of 4 rate hikes this year instead of 3.

There has been little movement in the bond markets this week as the Federal Reserve has successfully managed to sell $250bn of US treasuries and bills. Yields have had to rise to attract investors, the two-year treasury was auctioned off at a yield of 2.25%.

Posted on February 22, 2018 .