Euro Rates : A higher equilibrium in rates, time to start receiving?
ECB President Mario Draghi’s remarks two weeks ago during the ECB forum in Sintra have led to a significant rise in interest rates. Could Dutch pension funds be triggered to increase their hedge ratios at these higher rates? According to our model we find that pension funds with an old liability profile are being triggered to increase their hedges. Long end receiving in swaps should start soon if it hasn’t started already. We judge that the 1.5% trigger level that we have identified in the 20y EUR swap rate will lead to a gradual increase in the hedge ratio by 10%. Our model also estimates that receiving activity in EUR swaps will be relatively evenly dispersed across the various maturities. The majority of the fixed receiving in swaps will be concentrated in the 15y, 20y and 30y maturity buckets. This should result in significant widening i.e. steepening pressure in the spread between the 50y and 30y EUR swap rates. Regardless of the expected steepening pressure in the 30s50s spread it has remained stable recently. We judge that in a rise of rates and increased volatility the value of having exposure to convexity, for investors that invest in these maturity segments, increases. This should temporarily keep a lid on further steepening. However we expect this spread to steepen further out.(Fouad Mehadi)170711-Global-Daily.pdf (49 KB)
Precious Metals : Close to the bottom
Since mid-June, precious metal prices have fallen sharply (5% for gold, 9% for silver, 6% for platinum and 2% for palladium), despite dollar weakness. There are several reasons for this. For a start, the Fed and other central bank officials have turned more hawkish and that has wrong-footed financial markets. As a result, government bond yields have risen, expectations about monetary policy have been adjusted upwards and currencies of countries with (relatively) hawkish central banks have risen with the exception of the US dollar. Moreover, inflation expectations have moved lower as inflation data have surprised on the downside. With higher nominal yields and lower inflation expectations, real yields have risen. This has been a major negative force for precious metal prices. Higher real yields have more than overshadowed the effect of the lower US dollar on precious metal prices. We have downgraded our gold, silver and platinum price forecasts. Gold, silver and platinum prices could fall under some pressure in the coming weeks and months as financial markets will price in the prospect of a 25bp rate by the Fed this year and two 25bp rate hikes next year. However, the downside in gold, silver and platinum prices will be limited. We think that the rise in US real yields (10y) for 2017 is behind us and we expect more US dollar weakness. We think that gold, silver and platinum prices are close to the bottom and this is reflected in our new price forecasts. Our new year end gold forecast is USD 1,210 (was USD 1,300). We expect higher gold, silver and platinum prices in 2018. For more see our note Precious Metals Watch – Close to the bottom (Georgette Boele)