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Yield Curve Flattening

Published 23/06/2017, 10:57 am
Updated 09/07/2023, 08:32 pm

Originally published by Rivkin Securities

Volatility in the ASX has increased in recent weeks and this week has been no exception. Yesterday, the index was up 1.0% shortly before the close but fell in the last 30 minutes of the session to finish just 0.7% higher. The rally recovered some of Wednesday’s losses but the index is still down for the week. On the other hand, US markets have been very subdued with the S&P 500 and Dow Jones closing essentially flat overnight.

Oil managed to stabilise last night which may be partly due to Hurricane Cindy that has impacted oil production in the Gulf of Mexico. Both oil and natural gas production have been affected although the storm is expected to weaken as it makes landfall. WTI oil is still trading below $43 per barrel but is now slightly off its recent lows.

US bond yields have been falling steadily since March of this year despite the recent interest rate hike. With the 10-year yield at 2.15% and the cash rate at 1.0%, the yield curve is now particularly ‘flat’ meaning that the difference between short and long-term yields is quite small. This normally occurs for an economy that is about to enter recession so it indicates a certain degree of scepticism among bond traders regarding the economic recovery. Market pricing is suggesting a roughly 50% chance of another rate hike this year although there is virtually no chance of a hike at the next FOMC meeting in approximately five weeks.

ASX 200 futures are pointing to a slightly higher open this morning.

Data releases:

- Euro Flash Manufacturing PMI 6:00pm AEST

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