Rates: Not bothered

Core rates markets continue to trade with remarkable resilience to buoyant macro prints.

Part of this reflects captive buyers of core bonds. These include central banks through bond buying programmes. It would also include pension funds that are often actuarially constrained to be long the same type of rates that their liabilities are discounted at. But also, a large rump of accounts sitting outside of the US view the level of US market rates as generous when compared to their domestic ones.

Another part of the explanation centres on an implied rates market objection to the medium-term sustainability of macro positivity. Simply based off market levels, the vision of the future coming from the rates market remains a troubled one. The eurozone 10yr swap rate has had its nose above zero since February, but is struggling now in low-single digits. The US 10yr is in the 1.3% area and well off the 1.75% level touched in March. It’s all a bit dour.

The good news is curves are relatively steep, with high long rates telegraphing that central bank rate hikes are coming. But arguably curves should be much steeper. The simplest means to achieve this would be through the unwinding of large negative real rates. But, even in the past week real yields have moved deeper into negative territory again (US 10yr back at -1%).