Bond yields have peaked, global economy set to slow as US continues rate rises, says ABN AMRO

Bond yields have peaked, global economy set to slow as US continues rate rises, says ABN AMRO London, 13 September 2004 Following modest upside in the coming months, bond yields are set to fall and yield curves flatten in 2005 as global economic growth slows, according to research by ABN AMRO. The report, titled Bond Yields Have Peaked and jointly authored by ABN AMRO's Rates, Economics and FX strategy teams, predicts the current global economic slowdown will not be strong enough to prevent the US Federal Reserve from tightening policy. September and November are expected to bring consecutive 25 bps rate rises, rising to a peak of 3.25% by next summer. And while the slowing of the US economy is not expected to become more pronounced until 2005, 10-year US Treasury notes have most likely peaked, suggesting the bond market will remain volatile going into next year but within 2004 ranges. "Recent economic evidence suggests that bond yields have already posted their cycle peak. However, the rally since mid-June has coincided with a severe trend of weaker than expected data. While this trend is unlikely to continue, as shown by last week's US Payrolls data, we find it difficult to see 10-year yields in the US and European Union passing the highs of June 2004," said Robert Lind, ABN AMRO's top ranked Chief European Economist*. In 2005, bond markets will endure a synchronised slowdown in global economic growth as the US, UK and China tighten monetary policy, while Japan and Europe suffer from weak export growth and a decrease in domestic demand. The price of oil is expected to stabilise and then average USD 36/bbl and is not expected to be a major factor in the slowdown. Graham McDevitt, Global Head of Rates Strategy at ABN AMRO, identifies two key themes that will influence bond yields next year: ? The US Federal Reserve will continue to normalise policy, bringing rates in-line with growth ? The US will under-perform historical growth averages in 2005 "Both these factors suggest that the USD yield curve will experience bull flattening in 2005. As global bond markets continue to operate with a high correlation to USD yields, a forthcoming slowdown in the US economy points to further downside for bond yields," he said. more..// ABN AMRO's Global Head of FX Strategy, Tony Norfield, also sees rooms for the US dollar to strengthen against European and most other major currencies in the coming months. "Our analysis suggests that the US dollar has been oversold relative to the underlying investment flows into and out of the US. An additional factor that has weakened the dollar, that of high degrees of hedging dollar risk by investors, also looks likely to subside as the Fed hikes rates," he said. (ABN AMRO's pan-European economic research was ranked no.1 by Extel in 2004 and 2003) - - - To contact ABN AMRO Rates & Economic Research analysts, please see directory overleaf Media enquiries: Katja Margell +46 8 5723 5130 Notes to Editors: Netherlands-based ABN AMRO is a leading international bank with total assets of EUR 632.8 bln (as at 30 June 2004). It has over 3,000 branches in more than 60 countries and territories, and has a staff of about 110,000 full-time equivalents worldwide. ABN AMRO is listed on the Euronext, London and New York stock exchanges. ABN AMRO operates through three Strategic Business Units, each responsible for managing a distinct client segment. Wholesale Clients provides integrated corporate and investment banking services to corporate, institutional and public sector clients worldwide. Consumer & Commercial Clients focuses on retail and SME clients in three home markets - the Netherlands, the US Midwest and Brazil and in a number of selected growth markets. Private Clients & Asset Management provides private banking services to wealthy clients and investment products to financial intermediaries and institutional clients. ABN AMRO's Wholesale Clients Strategic Business Unit provides integrated corporate and investment banking solutions to corporate, institutional and public sector clients in about 50 countries. Its client-led approach is sector based and structured around four product groups: Financial Markets, which includes fixed income, syndicated loans, treasury, structured and project finance and risk management; Working Capital, which offers liquidity management, global payments and receivables and trade finance; Corporate Finance & Equities, providing corporate advisory as well as equity capital markets expertise and secondary market services; and Private Equity. With a global network, specialists in all major industry sectors and a broad range of products, ABN AMRO provides local and global expertise for complex cross-border deals. ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2004/09/13/20040910BIT21350/wkr0005.pdf Pressrelease with Global Rates & Economic Research Team http://www.waymaker.net/bitonline/2004/09/13/20040910BIT21350/wkr0003.pdf Global Outlook