[ANALYST REPORT] Jackson Hole Meeting: Waiting for ‘great boast’

With a week left until the Jackson Hole Meeting, we expect global bond markets to take a wait-and-see approach. 

But, as the US Fed chair is unlikely to give hints also whether there will be a FF rate hike in September, global bond markets should resume strengthening after the meeting. Against this backdrop, we suggest expanding duration on KTBs.

▶ Major issues in global bond markets

This week, global bond markets will likely take wait-and-see approach in the run up to the US Fed’s Jackson Hole Meeting (Aug 26). The meeting will present an important opportunity to debate the merits of a potential federal funds (FF) rate hike in September. 

At this juncture, market concerns are being stoked by the hawkish stances being taken by some local Federal Reserve Bank (FRB) heads, who are calling a FF rate uptick in September.

However, noting the old British expression ‘great boast and small roast’, we would be surprised (given that recently mixed US economic indicators are not providing any clear direction) if Fed Chair Janet Yellen gives public hints at the meeting as to whether there will actually be a FF rate hike in September. 

Instead, we expect to see the Fed to take a ‘data-dependent’ posture. Also, we point out that market pressure for a FF rate hike has somewhat toned down due to slower-than-expected inflation indicators in July. As such, we forecast that FF rate hike worries will ease and global bond markets will again turn to strengthen after the meeting.

On the domestic front, we believe that fears towards additional supply of long-term KTBs (such fears have recently heightened due to the release of a plan for the issuance of 50yr KTB issuances) will lower gradually in light of likely ample pent-up demand—we point out that the 50yr KTB issuance represents just a one-time event and will lead to a reduction in the amount of other long-term KTB issuances.

▶ Weekly global bond market outlook and trading recommendations

Developed markets: This week, while the US bond market will likely take a wait-and-see approach while awaiting the Jackson Hole Meeting, it should resume strengthening gradually following the event. 

This week, we expect the 10yr US TB yield to move between 1.50~1.62%, the US 2/10yr spread and the US TB-Bund spread both to remain range bound, and the EMU spread to narrow slightly.

Asia (excluding Japan): Despite the recent hawkish comments made by some local FRB heads, bond markets in EMs will likely continue strengthening in response to attractive yield levels. In particular, expectations that new monetary easing measures will be rolled out are high in Indonesia and China.

Domestic bond market: This week, we forecast that the bond market will remain range bound while gathering energy for its next rally, with the 3yr KTB yield ranging between 1.20~1.25%, the 5yr KTB yield moving between 1.22~1.28%, and the 10yr KTB yield fluctuating between 1.38~1.45%.

Trade suggestions: We advise: 1) remaining long on 10yr KTBis; 2) remaining long on 10yr KTBs; 3) remaining long on 5yr Indonesia bonds; 4) maintaining a US 2/10 flattener position; and 5) remaining long on 5yr Thailand bonds.

Source: NH Investment & Securities