Afternoon analysis 06.07.2016

New record low level of the developed markets treasury bonds. Tarullo's views are closer to Dudley's, rather than to Williams'. The zloty remained stable during the afternoon trade.

New records

The situation in the treasury debt instruments continues to amaze. Today, profitability of treasury bonds of Germany, Japan and Switzerland decreased to their record low level yet again. Moreover, it is worth noting that all Switzerland's bonds have a negative profitability. Additionally, you have to pay 0.6% each year, for owning ten-year treasury bonds.

Negative rates are not a reason for joy, despite that many countries is allowed to give back less money than they borrowed. It indicates, how disturbed the market of these assets actually is. The reasons for this are monetary easing, fear of a worse situation on more hazardous instruments, and very low estimations regarding the future inflation. The latter reason is related to a low economic growth, as well as a small pressure on an increase in salaries.

In the environment of negative interest rates and negative profitability of treasury bonds, the American bonds continue to behave relatively normal. They are losing by approximately 1.35-1.40% on the ten-year bonds. This result is record low as well, considering the history of the American debt instruments. However, it is definitely more than negative 0.2% in Germany, as well as negative 0.3% in Japan.

This may partially be an argument that will attract capital to the dollar, especially that profit on the currency itself is possible as well. On the other hand, spread between the American and the European bonds may tighten, because the potential for a further depreciation is more limited with negative, rather than positive profitability. Thus, the argument of disproportion in interest rates of the euro zone and the USA (that theoretically may be considered as positive for the dollar), may begin to lose its significance at a certain point.

Tarullo like Dudley. Zloty is stable

Daniel Tarullo's comments appeared in the market this afternoon. Views of the Federal Reserve governor are clearly closer to the views that William Dudley presented yesterday, rather than the ones presented by John Williams (more about these comments in yesterday's daily analysis).

He claimed that, “we should observe how the situation will look like after Brexit.” He also said that, “we are dealing with a significant uncertainty and nobody knows what its scale will be.” In general, this goes to show that the Federal Reserve representatives are trying not to jump to conclusions. However, this gives the impression that there may be no hikes this year.

The zloty is behaving relatively calm, considering quite a strong pressure on the pound, as well as overvalue in the foreign stock markets. Situation on the Hungarian forint is similar. Thus, it is possible that if the global sentiment does not clearly deteriorate, the Polish currency will remain stable against the euro. The current situation in the debt instruments market may discourage some of investors to put their capital in the Polish treasury bonds. They continue to bring a 2.8% profits on the ten-year bonds.