All eyes on June Fed hike probabilities, as supply continues
Selling pressure on bonds seems unrelenting and more likely stemming, in the short term, from borrowers rushing to issue debt in the current window. Headlines regarding the ongoing debt ceiling negotiations are a distant second but, here, we think the signal-to-noise ratio of plentiful headlines is characteristically low. In the meantime, low volatility breeds more favourable primary market conditions, and if Monday is anything to go by, the appetite to issue debt remains healthy. Our base case is for this to continue, although near-term events risks, especially tomorrow’s FOMC minutes, could at least pause the bonds sell-off.
The market's fear is that the Fed may not be done with its hiking cycle
Interestingly, it appears that most selling pressure in the past several days occurred in US hours. This may tie in with the two explanations above for bond market weakness, but we feel there is an underlying current of fear running through investors. This fear is that the Fed may not be done with its hiking cycle and that a more resilient economy than expected will catch markets off guard once again. Recent Fed commentary, admittedly from noted hawks Neel Kashkari and James Bullard, supports the view that not all on the FOMC want the probability of a June hike to go to zero, which makes good risk management sense. So far, it has struggled to rise above 30%.
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