Bonds: Interest rate curves steepen, FOMC voters set to speak

Interest rate curves steepened further on Wednesday evening in both the US and the UK, following the release of what some analysts described as a more hawkish set of Fed minutes.

Most market commentary focused on the minutes's reference to the fact that an increased number of policy-makers now saw an increased chance of an interest rate hike come the 15 June meeting of the Federal Open Market Committee, the US central bank's equivalent of the Monetary Policy Committee.

The summary of US rate-setters deliberations when they last met at the towards the end of April surprised traders who had expected the minutes would be outdated, reflecting a more 'dovish' slant - or a smaller bias towards tightening policy.

Instead, they were more in-line with recent more 'hawkish' remarks from several top Fed officials.

The most significant of those came from the president of the Federal Reserve bank of Boston, Eric Rosengren, on 12 May.

Rosengren's views tended to lie more towards the dovish camp and yet on hat occasion he explicitly cited the possibility of a June rate hike.

Critically, and unlike some of the most hawkish officials who had made public remarks in recent days, Rosengren was a voting member on the FOMC in 2016.

Hence, there was now keen interest in what other FOMC voters's views were. On Thursday, two of those were set to take to the podium, Fed vice-chair Stanley Fischer and NY Fed president William Dudley.

Jim Reid at Deutsche Bank said the former's views were closely aligned with those of Fed chair Janet Yellen.

At least until recently, Dudley's views lay more on the dovish side of the spectrum of Fed rate views.

Also to take into account, over the last few sessions at least one large investment bank had pared its forecasts for interest rate hikes Stateside in 2016, telling clients the Fed would raise rates just once.

Fed funds futures began to crawl higher in the days following Rosengren's speech and as of 09:40 BST on Thursday morning were assigning a 33.8% probability to a June rate hike, having risen to as much as 39% on Wednesday evening.

Chances of a move in December stood at 79.5%, almost fully pricing-in a 25 basis point increase by the date of the 21 December FOMC.

To take note of, unlike in recent months, the slope of the US Treasury yield curve, the difference between the yields on two and ten-year benchmark US government debt, steepened after the release of the minutes - potentially a positive indication that the economy can withstand such a move.

In parallel, as of 19:16 BST on Wednesday the yield on the benchmark two-year Gilt was higher by five basis points to 0.43% and that on the 10-year bond by seven basis points to 1.44% against a backdrop of some poll results suggesting a smaller chance Britons would vote to leave the European Union on 23 June.

"At this meeting, "a few" members thought an immediate hike would be justified, compared to "a couple" in March. Clearly, then, these minutes reflect a substantial step towards the next hike. [...] The latest polls point clearly to the U.K. voting to remain in the EU, but the risk of exit is not zero and a cautious Fed - like this one - likely will view the cost of waiting a while longer to be quite small," was the view from Ian Shepherdson, chief economist at Pantheon Macroeconomics.

"That said there was a bit of balance in that comment with the sentence that 'participants expressed a range of views about the likelihood that incoming information would make it appropriate to adjust the stance of policy at the time of the next meeting' with some officials expressing confidence that the incoming data would be sufficient enough to make a June increase appropriate, but offset by 'several participants' who seemed more concerned that the data would not provide 'sufficiently clear signals' to determine if a move next month is warranted," chipped in Jim Reid at Deutsche Bank.