Divyang Shah, Senior IFR Strategist
Even the traditionally very safe short-end is under pressure as markets remain fearful that beyond an exit of unconventional measures there will be rate hikes. Not even the eurozone is immune from this with 12x24 EONIA above 50bp and not far from levels we saw early this year when there were concerns over three-year LTRO repayments.
This is a market that is adjusting to an environment where central banks seem to have found a new script that involves exiting crisis policies. The BIS has laid out the concerns and challenge in its annual report saying “the longer the current accommodative conditions persist, the bigger the exit challenges become”.
If the liquidity that has greased the wheels of all markets over the last few years is going to be wound down then markets have more adjusting to do. As we saw with Bullard’s comments last week the Fed has moved away from actions to meet a “policy objective” to “calendar objectives”.
Whether such exits are premature will be a topic for discussion for many months but for now we have to be cognisant that this is more than just about a Fed exit.
It’s looking more like a co-ordinated exit that is being combined with a PBOC that also wants to rein in the excesses. Cash and the USD will remain favoured in such an environment.
