Recession concerns and the impact on long term yields – UOB
|UOB Group’s Head of Markets Strategy Heng Koon How, CAIA, Senior FX Strategist Peter Chia, Rates Strategist Victor Yong and Markets Strategist Quek Ser Leang assess the ongoing recession fears and its effect on the long term yield.
Key Takeaways
“The Recession vs Inflation debate has intensified and taken an interesting turn. For now, it would appear that Recession fears are dominating amidst increasing signs of growth slowdown. However, it is important to note that Inflation risks are far from over and the US Federal Reserve (Fed) and other global central banks remain committed to continue their aggressive rate hikes in the months ahead.”
“We maintain our positive core view on a stronger USD and note that this latest USD rally still has legs and with USD strength extending further into this current Fed hiking cycle than in previous cycles. Elevated volatility and increasing safe haven needs are supportive of further USD strength.”
“In the Major FX, we lower our EUR/USD forecast and see risk of parity for the remaining months of the year as a worsening energy crisis in Europe and on-going political crisis in Italy nullify the yield support from the start of the ECB’s rate hiking cycle. On the other hand, USD/JPY is finally seeing prospects of topping out after the retreat in 10-year US Treasuries yield.”
“In terms of short-term rates outlook, we continue to see on-going rate hikes from the US Fed as well as other central banks in the months ahead. As such, the rise in short term rates is not over. We raise our year end forecasts for 3-month compounded SOFR and SORA to 3.30% and 2.60% respectively (from 2.99% and 2.29% previously).”
“As for long term yield outlook, elevated recession fears have started to dampen and weigh on long term yield. We lower our 10-year UST and SGS outlook for end of the year to 3.60% and 3.20% respectively (from 3.80% and 3.40% previously). Consequently, as a result of higher short term rates and the pull back in long term yield, yield curve inversion can persist for longer during high inflation regimes or until evidence that monetary policy tightening has peaked.”
“In terms of technical analysis, we note that after the recent heavy pullback in yield, the risk for 10-year US Treasuries yield is still clearly on the downside; next support levels to monitor are at 2.557% and 2.500%.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.