Fixed Income Monthly
The author is an analyst for NH Investment & Securities. He can be reached at sw.kang@nhqv.com -- Ed.
In 1H23, the US FF rate (r) was lower than r* and higher than r**. With the July hike, we believe that r has converged to the r* level. Over time, markets should come gradually to reflect the Fed's shift to a freeze stance. Although we expect a range-bound August, we advise taking advantage of good buying opportunities upon yield hikes.
FOMO and FEAR coexist in financial markets in light of r* > r > r**
In March, with the nominal FF rate (r) still below the real neutral rate (r*) but above the real neutral rate for financial market (r**), bank run event worries (r* > r > r**) were in play. The Fed then proceeded with aggressive rate hikes and massive liquidity injections to achieve the dual goals of price control and financial stability. In 1H23, the combination of FF rate below r* and liquidity supply was a like a festival for risk assets. But, the bond market, which is sensitive to funding rates, is now being dominated terminal rate angst.
July FF rate hike to mark last uptick this year
During the FOMC press conference, Powell stated that if the decline in inflation is credible and sustained, he will not stay in the tightening zone but will move to a neutral level. This implies that rates are currently in tightening territory and that inflation will determine future monetary policy. Weighing in on the July hike being the last given evidence of weakening demand-driven inflationary pressures. Sees the current US 10-year level as an attractive buying zone.
Implications of loan reform: r > r** becoming clear in Korea
The BOK’s proactive liquidity support for financial institutions evidences that its nominal key rate (r) is above the financial market neutral rate (r**). Given the end of the Fed’s FF rate upcycle, an easing in financial stability fears, and predicted core inflation stabilization by yearend, we do not expect another hike from the BOK this year. While the market will likely remain rangebound for now, it looks like an opportune time to prepare for 4Q23. We suggest monitoring for good buying opportunities upon yield hikes.