Rates Spark: Dutch pensions transition and a Fed attack

Note that Chair Powell is not being hauled into court just yet. There is a grand jury proceeding to get through first. This is the precedent to the case getting to court. Note that the grand jury could also decide that there is no case to answer, and then that would be the end of the story; no court case. Typically though, the grand jury has quite a low bar to surpass to get a case to an actual court, but it is still a bar that needs to be surpassed. The grand jury proceeding could take weeks, and if we get through that, an actual case could take months. This will run and run, and Chair Powell, it seems, is not for caving.

This, in part, is why the market reaction has been very muted. The other part-rationale, as summarised here, reflects the basic mathematics that we are dealing with. If Chair Powell were removed, and Lisa Cook is removed, and we get one retirement morphed into a 'MAGA dove' in 2026, we then have a total of four MAGA doves (including Stephen Miran). That's still a minority. The total FOMC is 12, so two-thirds would not be MAGA doves. They would remain well short of an FOMC take-over. The President clearly wants Chair Powell to vacate his seat. If he does, it’s still just one additional vote. Given that, the odds are that monetary policy does not get driven by the White House. Impacted, yes. But not dominated by.

But from a sentiment perspective, it’s still a big deal. Attacking the Fed Chair like this is practically unprecedented. And in the extreme, dramatic curve steepening from both ends (with longer tenor yields up), and a weaker US dollar are likely consequences, should things really unravel. Still not our base view. But as a risk case view, it's rising in probability.

Euro rates once again showed how domestic drivers can dominate global factors and Dutch pension funds are the ones moving markets this time. The second-largest Dutch pension fund (PFZW, €250bn AUM) published a more detailed outline of their new hedging strategy, which triggered a significant curve flattening on Monday. In this updated plan, interest rate hedges will be 20% for younger participants and 100% for those in retirement. These ratios are likely significantly higher than markets anticipated. To put the numbers in perspective, ABP (the largest fund, aiming to transition in 2027) published hedging plans of 10% for younger people and 75% for elderly ones.

In effect, this means fewer fixed receiver swaps will have to be unwound, reducing the impact from the transition. We estimate that a 10 percentage point higher hedging ratio for PFZW translates to an increased demand for fixed receiver swaps of about €40m DV01. Going forward we expect more volatility from the Dutch pension fund transition. In the near term, we may see more flattening pressures as speculative positions get challenged. As pension flows start materialising, however, the overall net impact should still be steeper curves.

The main release on Tuesday will be the US CPI. November's data was likely skewed by the late data collection given the government shutdown. Reverting to normal collection means our economists see some upside risk to the December figure, with a 0.4% month-on-month core rate that would lift the year-on-year figure to 2.8%. Other data to watch are the ADP weekly data for the jobs market as well as the NFIB's small business sentiment indicator. Public comments by the Fed’s Williams, Musalem and Barkin are likely to receive more scrutiny after the latest onslaught on Fed independence. Of note elsewhere are speeches from the UK’s Governor Bailey and the ECB’s Kocher.

Primary markets remain busy. The €SSA market kicked off the week with a €7bn, two-tranche deal from the EFSF (3y and 10y) and a €1bn 10y deal from Île-de-France. For Tuesday, the EU is lined up with a new 3y and 30y tap, while French CADES mandated a 7y social bond. While spreads are still tighter versus the end of last year, Monday showed signs of softness as spreads widened between 1bp to 2bp across the sectors.

In the govie space, Greece will be in the market for a new 10y benchmark. This comes alongside scheduled auctions from Austria (10y and 30y taps), Italy (new 3y) and Germany (new 5y). Elsewhere, the UK sells 10y gilt linkers and the US Treasury will auction US$22bn in 30y bonds.