Thursday, 14 May, 2020
Deutsche offers four reasons why negative rate pricing may persist:
Deutsche offers four reasons why negative rate pricing may persist:
– 1) Fed hikes very unlikely for foreseeable future: “market participants
believe that negative rates are significantly more likely, or alternatively
driven by a truncation of the upper end of the distribution if the size and
likelihood of future rate increases declines”
– 2) Negative term premia: Cites Fed research that funds rate term premium
estimates may be non-linear and significantly negative over the medium term.
– 3) Sub-zero rates seen possible: Fed’s survey of primary dealers shows some
belief that lower bound is negative, market possibly pricing Fed following
similar path to other central banks that couldn’t meet policy objectives
– 4) (Similar to 3) The Fed may need to provide more accommodation: whether an
approach of outcome-based forward guidance, yield curve control and traditional
QE (all of which Deutsche expects) will be sufficient in this crisis “remains an
open question”, particularly if QE does not have as much “bang for the buck” as
it did in the past – meaning “reduced policy space is likely to leave market
participants anticipating the possibility of negative rates down the road.”
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