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Foreign Exchange

Bond Outlook February 22nd

Investors’ conclusions from flattening/inverting yield curves will differ for private, institutional and government buyers, and for issuers. Private investors have no reason to go long, but the others…

Bond Outlook [by bridport & cie, February 22nd 2006]

This week, we shall consider the reaction of different groups of market participants to the current shape of the yield curve and the expectations for both the USD and EUR curves.

 

The flat US yield curve, with full inversion expected as the Fed goes up from 4½% to 4¾% in March, and very likely 5% or higher thereafter, presents investors with a dilemma, but of a different nature for private investors, institutional investors and central banks. Private investors have little incentive to buy long maturities when they can achieve the same yield with T-Bills without taking the risk of the long end of the yield curve rising. Indeed, data reported by La Chronique Agora show both a decline in overall private foreign purchases of US assets (from USD 50.8 billion in November to USD 12.7 billion in December) and also a distinct preference for short maturities. Nevertheless, the US Treasury was still able to issue its new 30-year bond without difficulty. That is where other categories of investor come to the rescue.

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