With bond markets calming down this week after the rise in yields brought on by the Trump victory, the focus will be on Fed chair Janet Yellen’s congressional testimony this evening. The market will be eagerly awaiting the chair’s thoughts post the Trump victory as to the impact on monetary policy over the coming year or so. The futures market has already priced in a rise in the funds rate at the 13-14 December meeting at around 94% and so little new information is expected about the near term but of major importance will be any information Yellen gives as to the likely pace of further rises during 2017.
All the Fed officials who have spoken over the last week, and that is 9 of the 17 regional bank presidents and Fed governors, have said they are unsure of the impact Trump policies could have on the outlook due to the fact that it is not yet known what policies will be enacted or even pursued.
As a sideline, Oxford Dictionaries named ‘Post-Truth’ as word of the year defined as ‘relating to or denoting circumstances in which objective facts are less influential in shaping public opinion than appeals to emotion and personal belief’. They said there was a huge rise in the use of the word after the UK referendum and the US presidential election. Reminds us of ‘lies, damned lies and statistics’ Mark Twain.
Back on track, while Trump policies could spur growth through tax cuts and fiscal spending they could also hinder through restrictive trade and less immigration, and with the president elect not taking office until 20th January we expect little from the Fed chair other than confirming the Fed’s main objectives.
One factor which may assist the Fed with future interest rates is the actions of the BOJ overnight, where they offered to buy an unlimited amount of debt to hold interest rates at their target levels of -10bp for overnight rates and 0.00bp for ten year yields. This halted a five day move to higher rates in Japanese bonds and calmed markets from Australia to Germany as well as aiding US Treasuries. It is worth noting, and this could be a play coming on stream, domestic Japanese investors, with yields so low, can now buy ten year US Treasury notes currency hedged back to Yen at a cost of just 1% per annum resulting in a synthetic Japanese yield of 1.19%. This factor could see a substantial inflow into US Treasuries over the coming period.
Another supporting factor for US markets could be a reversal of US domestic investor flows. Over the last few decades US domestic investors have moved to hold around $9trn in foreign assets, that is up to 13% of portfolios from just 2% in the 1970s. With the US dollar moving up strongly, if US funds turn ‘risk averse’ as seen in 2008, these higher yields in their own domestic back yard could swing capital flows homeward bound. As we always say ‘with volatility comes opportunity’.