Yields collapse on Yellen's speech; market reverses on Fischer's suggestion that Yellen's speech inconsistent with two hikes in 2016; markets to watch employment data for next moves

By Jason Wong

It was a choppy session for US Treasuries on Friday as the market absorbed the cacophony of Fed speakers at the Jackson Hole symposium.

The US 10-year rate rose from 1.56% to 1.60% on initial headlines about Yellen talking about the strengthening case for rate hikes. 

After fully digesting the speech, rates plunged down to 1.53%. Comments about the longer term outlook were dovish – a significant portion of the speech was devoted to how the Fed would deal to the next downturn, and included comments about how the average level of the nominal Fed Funds rate down the road might turn out to be only 2%, implying that asset purchases and forward guidance might have to be pushed to extremes to compensate.

Enter Vice-Chair Fischer. It was Fischer, perhaps sensing that the market was moving in the wrong direction that caused the greatest market reaction. He suggested that Yellen’s speech was not inconsistent with two rate hikes this year. Following that, the 10-year rate shot up higher and closed on its high for the day at 1.63%.

The US OIS market now shows a 42% chance of a 25bps tightening next month and a 76% chance of a tightening before the end of the year, each up about 10 percentage points from the previous day. 

The focus now turns to this Friday night’s US employment report. On a soft result the September probability would likely dive towards zero. A strong result would increase the chance of a hike, but the FOMC would be sensitive to any market reaction, including the strength of the USD over the 3½ weeks, and any other incoming data.

Since the local market close on Friday, the 10-year rate is 7bps higher. This will flow through into local rates on the open. 

Friday’s trading itself was a dull affair, with little movement in rates as the market awaited Yellen’s speech.

Daily swap rates

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Jason Wong is on the BNZ Research team. All its research is available here.