UOB Global Economics and Markets Research’s senior economist Alvin Liew says the most consequential release of the Sep FOMC is likely the Dotplot which indicated strong but not unanimous support among policy members for one more hike in 2023.
“The September Dotplot showed 10 of the 19 FOMC members expect the policy rate to remain above 5% next year (versus just 6 members who echoed that view in Jun) while only 2 members expect rates to fall below 4.5% in the Sep Dotplot (versus 8 members indicated that in Jun FOMC). The implication is very clear, that expectations for rate cuts in 2024 have been drastically curbed and Fed policy could remain tight for a much longer duration than what we previously believed,” Liew writes of the Sept 20 decision by the Fed to leave rates unchanged this month.
Sailesh Kumar Jha, Group Chief Economist and Head of Market Research, RHB Bank, expects the 10-year US treasury yield to rise further from current levels. “Our end-2023 UST10YR yield forecast is revised to around 5% from 4.5-5.%. In 1H2024, we expect UST10YR yields to peak at around 5.5%, with the balance of risks tilted towards a print of 6.0%,” he says.
“Tactically, for 4Q2023 on a global basis, we are overweight cash, market weight equities, and underweight fixed income on back of a further rise in UST10YR yields,” Jha adds.
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On the bond front, JP Morgan announced the inclusion of India's government bonds in the JP Morgan Government Bond Index-Emerging Markets (GBI-EM Bond Index). The inclusion takes place as at end-June 2024, with the weight increasing by 1% a month reaching the index ceiling of 10% by end-March 2025.
“The assets tracking the index have been mentioned as being around US$210 billion, which implies inflows of US$21 billion by March 2024. The flows will be substantial for FY2025 in providing stable funding for Indian government bonds (IGB) and cushion [for] India’s balance of payments against a widening of the current account deficit,” states an update by Bank of America.
“IGB yields have held up well this year even as domestic inflation went sharply higher, markets priced rate hikes, liquidity tightened and bond issuance stayed elevated,” BofA notes.
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However, BofA expects India’s inclusion to reduce weights of other markets which may likely be Malaysia and Thailand.
