Breaking News
Investing Pro 0
Cyber Monday SALE: Up to 54% OFF InvestingPro+ CLAIM OFFER

Rates Outlook 2023: Belt Up, We’re Going Down

By ING Economic and Financial AnalysisBondsNov 10, 2022 01:25PM ET
www.investing.com/analysis/rates-outlook-2023-belt-up-were-going-down-200632229
Rates Outlook 2023: Belt Up, We’re Going Down
By ING Economic and Financial Analysis   |  Nov 10, 2022 01:25PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
DX
-0.24%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
US2YT=X
+0.05%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

Bond market returns for 2022 have been horrific, right along the credit curve. For 2023, returns will be helped by a higher starting running yield and subsequent falls in market rates. Bonds will be a good place to be, especially higher on the credit spectrum. Brace for a reduction in liquidity and more available collateral as key themes, too.

The energy crisis this year saw us drawing parallels to the 1970s and 80s. Dollar strength was a net outcome as the Volcker years generated high real rates to kill inflation. The collapse in tech stocks, meanwhile, has struck a similar chord to the dot com boom and bust of 1999/2000. That period also saw the dollar in vogue. And as we pick through the bones of the 2019/20 pandemic fallout, we're reminded of the great financial crisis in 2007/08, as housing markets suffered intense pressure. So many parallels, but none are perfect. Our story for 2023 draws on these with a modern twist. As we know, history doesn't repeat itself, but it often rhymes.

Inflation and Fed Funds Rate Back to the 1970s (%)
Inflation and Fed Funds Rate Back to the 1970s (%)

So what do we see? The Federal Reserve, the European Central Bank, and the Bank of England will all undershoot the current market discount for terminal rates, but we should get quite close to the tops that the market expects. For market rates, we need to see those peaks before we can conclusively declare the top. That implies that market rates should remain under upward pressure, at least through the turn of the year and likely into the early part of the first quarter of 2023. After that, it's all about market rates concluding that if indeed we have peaked, the next move must be down. Actual Fed rate cuts in the second half will solidify this move, even if the ECB decides to stand still.

Overall, market rates in the 10yr are projected to fall by some 100bp in 2023 (US by a bit more and eurozone by half that), and the US 2-year should fall by more still if we are right and the Fed does cut in the second half. The US curve should steepen by more than the eurozone curve as the ECB steers clear from actually cutting rates in 2023. The peak in the Fed funds rate should act to ease the US dollar premium, and we'll see that in an easing in the US dollar cross-currency basis. The second half of 2023 should see some meaningful convergence of eurozone to US market rates. All-in spreads, especially those comprising the Japanese yen basis, should narrow significantly.

The energy crisis in Europe adds to bond supply pressure as economies struggle to deal with recessions while at the same time buffering their economies from higher energy costs. This increase in supply is a driver for a widening in swap spreads, as government bonds, at the same time, unwind some of the quantitative easing-induced price premiums. Quantitative tightening is also humming in the background but is a much bigger deal in the US relative to the eurozone or the UK. Tighter conditions also contribute to vulnerabilities in the system, a system that is already being stressed by gaps in prices, wider bid/offer spreads, and higher bank funding costs. In the US, repo should be pressured higher.

While a repeat of the great financial crisis is not anticipated, housing market pressure, resulting in system pressure and decent falls in inflation, will ultimately allow the Fed to cut in a dot com bust style by enough to avert a significant US recession. But recession there will be, with a bigger one in Europe, likely in play before we get to 2023. This all gels with room for decent fall in market rates through 2023.

We're not coming off 1970s-style starting points in terms of the level of rates, but we are coming off peaks in market rates that have not been seen since the noughties. The lows won't be as extreme either; we're not heading back down to zero this time. We should stop to the downside with handles of 2% and 3% rather than 0% (or close to) for market rates in the US and eurozone and with steeper curves to boot.

Even if inflation gets tamed in 2023, as we expect it will, we now know that an inflation vulnerability is back. That, plus more supply (especially in Europe) and balance sheet roll-off (especially in the US), should allow curves to steepen out, and actual US rate cuts will push in the same direction.

While the act of cutting rates will signal that central banks have brought inflation under control, prior hikes will leave deep macro pain. And in that environment, market rates will test lower, adding oomph to bond market returns, a silver lining to what will be a tough environment ahead.

Rates Outlook 2023: Belt Up, We’re Going Down
 

Related Articles

Rates Outlook 2023: Belt Up, We’re Going Down

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Teena Marie
Teena Marie Nov 12, 2022 3:24PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The turning point for when rates fall is when fed rate exceeds inflation. The exception was the so called Great Financial Crisis. As a side note, the biggest one day drop in10 year treasury yields since 2007 was two days ago Thursday 11/10. An extreme 7% AS IF the world was again on the brink of catastrophic global economic collapse. This is an EXTREME reaction to a marginal difference that inflation in October did not go up as much as September. I believe there is more to Thursday's bond market than most of are being told.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email