HERE WE GO AGAIN OLLIE
The start of month has seen volatility in the rate market increase again, reversing some of the nascent gains (to lower-yields) that we had seen over the past 2 weeks. As we had postulated, the overall rates market had been priced to such low inflation expectations it would not take much to push investors into needing more compensation for that risk. We have seen one of the most significant moves in the sovereign debt markets when Bunds trades from 7 bps to almost 80 bps a little over a month ago. Spread relationships with other sovereign curves pulled most other government bonds into the maelstrom, while the negative feedback loop made it difficult to break that cycle. We got some stability over the past few weeks, with weak U.S. data and moderating Euro data providing a catalyst to stabilize and bid up yields. At one point this week, both the Bund and treasuries were essentially unchanged from where they began at the beginning of the year, with 3 decimal place accuracy. The recent gains proved short-lived however, as better than expected inflation figures from Europe and lift-off supportive data points closer to home brought the same anxiety back into the market that we saw in early May. Similar to early May, we haven’t really seem much fundamental change, as the “beat” on EZ inflation still put absolute gains in the 0.3% y/y range, a far cry from the 2% target. Additionally, today’s ECB press conference had the regular soothing words from President Draghi, including the expected gain in economic data, a continuation of its QE buying program to completion, and no changes to inflation targets. The market nonetheless is behaving poorly raising the question of whether the efficacy of central bank stimulus is losing its steam. It remains too early to draw such a conclusion, although the tone remains bearish and towards higher-yields as we move into the summer and closer towards a fall rate hike in our opinion. We also expect the volatility in the fixed income markets to remain high as the MOVE index has spiked since early May.