Fixed Income Monthly
The author is an analyst for NH Investment & Securities. He can be reached at sw.kang@nhqv.com -- Ed.
Given the US government's cash-flow plans and the steep decline in core services prices (excl housing), the Fed's maximum number of rate hikes is expected to be one. If the Fed raises rates in July, it should be the last hike, but if there is a pause in July, the rate should remain unchanged for the rest of the year.
Strange June FOMC decision: Incongruity of hawkish adjustment and unanimous freeze
In June, the FOMC voted unanimously to keep the FF rate frozen despite a hawkish dot plot adjustment. This was due to the likely change in liquidity following the debt ceiling deal. From the third week after the debt ceiling deal, we started to see reserve reductions. With the normalization of Fed quantitative tightening, our call for double quantitative tightening should becoming a reality. Bank reserves are expected to shrink US$500bn~ 600bn by September.
July insurance hike would be last hike this year
Further hikes from the Fed would be for insurance purposes. Given the government's cash-flow plan and the steep decline in core services prices (excl housing), July is the last chance to raise rates, in our view. If the Fed pauses in July, rates should remain frozen through yearend given tightening liquidity and inflationary conditions. Assumung a maximum of one more hike, the current 10yr TB yields, which already reflect one hike, seem attractive.
Even if we see multiple FF rate increases, further hikes in Korea are unlikely
Korea’s forward rates are beginning to reflect one more hike in six months. Given the BOK governor's comments at the inflation review meeting, if the Fed's rate hikes are capped at one this year, another hike is unlikley in Korea. Also, Australia and Canada are not comparable to Korea as they have experienced sharp increases in housing costs. Current yield levels reflecting another hike are attractive.