The sell-off in long-term US Treasuries that started late last year has
intensified in the New Year as expectations for economic growth, inflation and
the deficit have ratcheted higher due to stronger economic activity and the prospective
impact of tax cuts. Overlaid on these fundamental drivers, a Bloomberg article
has ignited concern that the People’s Bank of China (PBOC) will reduce or stop
its purchases of US Treasuries at a time when the Fed has started paring its holdings
of Treasury debt as it begins normalizing the size of its balance sheet.
rise in long-term rates, while rapid, is in line with our forecast of a
year-end 10-year Treasury note yield of around 2.85%. Our outlook for higher
rates has been based on a combination of additional Fed tightening this year,
higher Treasury borrowing needs, reduced Fed long-term Treasury holdings, and
a gradual pick-up in inflation. Moreover, we continue to expect a resumption of
the flattening in the yield curve as the Fed tightens.
The market has some experience with China selling its Treasury holdings. China's holdings fell sharply from mid-2015 through late 2016 as it addressed weakness in the Yuan. However, the impact on the Treasury market could be different in this environment.
we have noted previously, the upside risk to our
forecast depends on how the bond term premium, which has been exceptionally
low, evolves in the face of reduced Fed holdings of Treauries, a cyclical upswing in
activity and wider deficits. In particular, the inflation term premium is of
key importance since it has been compressed by ongoing sluggish inflation
readings and low to declining inflation expectations
A blockbuster streak of jobs gains, solid economic activity and firming inflationary pressures will lead the Bank of Canada (BoC) to raise interest rates at its upcoming January policy meeting. Downside risks from NAFTA renegotiation, debt and housing persist, but the uncertainty alone will not prevent the BoC from tightening policy.
Increased budget deficits due to tax cuts and increased spending will boost Treasury debt issuance sharply in 2018. We project net marketable borrowing of $885 billion, a 66% increase from $534 billion in 2017 – the largest amount of net new Treasury supply since 2012. Fed redemptions will increase the amount of supply that has to be absorbed by other investors. That, along with a possible pullback from China, will likely put pressure on Treasury yields over the course of the year.
Could the UK be on the cusp of a productivity revival? Low unemployment, falling migration and rising non-wage labour costs all offer reasons for firms to boost efficiency and ensure strong H2 2017 productivity data is not merely a flash in the pan. Moreover, the “plucking” model of economic fluctuations suggests that a snapback from productivity’s dismal post-crisis performance could be as marked as the preceding weakness.
In general, the recent pick-up in labour force participation in the advanced economies appears to be more than a cyclical phenomenon associated with previously discouraged workers re-entering the workforce. Rather, it is a continuation of upward trending participation rates, particularly amongst older workers, that predates the global financial crisis.
Over the coming years, the average age of workers will increase and is likely to reduce the overall activity rate – a smaller proportion of older workers work compared to their prime-age peers. However, this may be more than offset by a higher proportion of older people working for longer, prompting the overall participation to continue to rise.
Import prices rose a less-than-expected 0.1%, despite continued gains in fuel-related import prices. Nonfuel import prices fell for the first time in five months, partially due to weaker prices on Chinese imports. Still, the multi-year trend of firming import price inflation remains in place. The present 3.0% y/y rate for calendar 2017 is the highest annual rate since 2011.Going forward, we expect a continued gradual firming in nonfuel import price inflation to coincide with a moderation in fuel-related import prices.