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22 Apr 2016
Reports of the death of central banks have been greatly exaggerated - TDS
Research Team at TDS, suggests that the current rally in risk seems predominantly central bank driven—cumulative declines in global real yields were eventually enough to support risky asset pricing.
Key Quotes
We have also seen the market start to unwind some of its excessive pessimism on downside risks to growth.
Each of these influences is likely reaching their limitations to lift risk substantially further without strong signs of accelerating growth, and while EM prospects look optically better for the next quarter or two, US data is now materially disappointing.
So directionally, the rally in global fixed income may be living on borrowed time, but we still likely have limited fuel for a significant takeoff.
Ultimately, if growth is collapsing, then real rates are nowhere close to low enough, but the first move in markets would be seeing risk fall back down towards rates. We can probably be less fearful in the immediate future of a significant growth shock, but the US is definitely slowing, so if that is the case, we could see a dovish Fed/BoJ next week giving this real rate driver a little further to run, but it is hard to see 10y real rates fall below the 2015 lows on just mild data disappointment.
So that means the next move in a recovery trade will be real rates slowly creeping higher up towards risky asset prices. That suggests the risk rally doesn’t need to run out of steam, it just may run on a few less cylinders than we’ve seen recently, at least until the base for global growth is broader.”
Key Quotes
We have also seen the market start to unwind some of its excessive pessimism on downside risks to growth.
Each of these influences is likely reaching their limitations to lift risk substantially further without strong signs of accelerating growth, and while EM prospects look optically better for the next quarter or two, US data is now materially disappointing.
So directionally, the rally in global fixed income may be living on borrowed time, but we still likely have limited fuel for a significant takeoff.
Ultimately, if growth is collapsing, then real rates are nowhere close to low enough, but the first move in markets would be seeing risk fall back down towards rates. We can probably be less fearful in the immediate future of a significant growth shock, but the US is definitely slowing, so if that is the case, we could see a dovish Fed/BoJ next week giving this real rate driver a little further to run, but it is hard to see 10y real rates fall below the 2015 lows on just mild data disappointment.
So that means the next move in a recovery trade will be real rates slowly creeping higher up towards risky asset prices. That suggests the risk rally doesn’t need to run out of steam, it just may run on a few less cylinders than we’ve seen recently, at least until the base for global growth is broader.”