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US FI markets risk the chances of a sell-off – Danske Bank

FXStreet (Edinburgh) - Analysts at Danske Bank have argued that a sell-off in the US fixed income markets is quite likely.

Key Quotes

“The market prices the Fed Funds futures being around 70bp higher at end-2016, so slightly below three hikes of 25bp priced in total before end-2016”.

“This is still below our forecast and the Fed projections, which implies five hikes in total in 2015 and 2016, so the market is probably still capable of pricing in further rate hikes in 2016, adding further upside pressure, especially on the short-end of the US yield curve”.

“However, this said, it is still our view that the FOMC will be eager to tell the market that it has no plans to hike rates aggressively. Furthermore, the wider spread to European Government Bond (EGB) yields also attracts investors into US fixed income adding support, especially to the longer end of the curve”.

“Overall, we see the risk of a further sell-off in the US fixed income market as relatively high. The recent move in US swap spreads into positive territory might be a warning that low liquidity could potentially exaggerate the current bearish move in the fixed income market”.

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