In the wake of the Brexit vote RBC Capital Markets has officially changed their Fed call and are now looking for the next hike to come in the middle of 2017 at the earliest.
Tom Porcelli, RBC Capital Markets’ Chief US Economist, says that Brexit has introduced the very real possibility of a domino effect across Europe and it will be a very long time before all the potential volatility in the region is over, which means it will likely be well into 2017 before the Fed has a clear path to continue tightening.
Moreover, Porcelli says that the fixed income market is currently more about flows than value. Market depth has diminished so large flows can cause exaggerated price effects and together with quarter-end at the end of this month, this means we are likely to have a test of liquidity in the coming days.
The overall impact of Brexit will be significant spread curve flattening at the back end says Porcelli. This will arise because of the conflict between insurance/pensions receiving in 30yrs and buying of 10yrs by foreign accounts and accounts trying to hedge corporate overweight positions.
Read the full report.