Yield curve control chat would accelerate on any material steepening
For the rates market discount to imply an improvement, it must first steepen. That way, the forwards begin to discount better times. The problem is the 5yr is only getting richer, typically not a good sign for macro optimism. But something has to give here. Either the curve snaps steeper in line with the risk-on mood. Or that's all a pipe dream, and this curve remains hammered down. That said, if the risk-on mode continues and the VIX remains anchored, then a creeping elevation in forward space would need to coincide with steepening.
That would not just put overall sentiment to the test, it would also accelerate the conversation on yield curve targetting. Yesterday the possibility of capping front end yields was widely discussed. Fine, but that is not where the issue would be if the curve were to re-steepen; by definition. Central banks do find longer tenors tougher to control, but if you are going to go down the route of targeting, then longer tenors have to be seriously considered.
The issue here is the effect that higher longer tenor rates would have on long tenor mortgage rates, and housing market impacts. Right now there is a ray of optimism in that space as mortgage applications get spurred on from ulta-low rates. A re-firming in the housing market has all kinds of positives for the wider economy. The US needs that, as we face the summer in an elevated default environment for high yield corporates.
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June 02, 2020 at 01:14PM
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Rates Spark: technical move, but a correct one - ING Think
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