With Markets recently focusing on the expectation of the US Quantitative Easing (QE) Program being tapered back, we have experienced a steepening of the yield curve, with longer term Swap rates rising significantly.

Under a scenario where QE in the US is ended, longer term yields are likely to rise even further. By way of explanation, when we first heard, on the 19th June, that the Fed was  planning to unwind the QE Program, 3 and 5 year rates spiked by c0.50%. Following this, rates retreated lower again, with the Fed clarifying that the tapering of QE would be dependent on the growth outlook and employment situation. Since then expectations have again started to build, that it’s not a matter of “if” but “when” we will see the end of QE, leading to the start of a higher interest rate environment.

The RBA meeting on the 3rd of September was as expected and no change to the cash rate, still sitting at 2.50%, however the statement lacked any commitment that the RBA is in an easing- bias . While the prospect of another cut is obviously data dependent, it would seem fair to suggest that if there is no cut by November then we may have seen the low in this current rate cycle, if this is the case the next move will be up.

Other factors contributing to movement in rates is the continuing improvement in parts of Europe and the USA. The market is increasingly confident that extraordinarily easy policy will be wound back and that global growth is about to kick up a gear. We have witnessed this of late in the form of stronger offshore economic figures.

Whilst some may have missed the lows in longer term rates we are definitely still at historically low levels.

Below is a snapshot of rates from early last year and the move of late from the lows in August

graph4

Author: Steven Slezak

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