Local markets expected to price in higher yields today following 'abrupt' jump in benchmark US rates

By Kymberly Martin

In a quiet day of trading the NZ swap curve closed a little steeper on Friday. 

On Friday night, US 10-year yields shot up to end the week at 2.24%.

The NZ market was a little in ‘wait and see’ mode in the lead up to Friday night’s US payrolls data, in the absence of key domestic data releases.

Overall the curve steepened a little as 2-year swap declined 2 bps, to 3.57% while 10-year rose 1bps to end the week at 3.86%.

The 2-10s curve ended the week at 29 bps, its highest level since early-Jan.

We anticipate further steepening today given Friday night’s moves in offshore yields.

The market’s response to the much awaited US payrolls report was abrupt. US yields gapped higher across the entire curve.

The combination of a very strong headline payrolls number and fall in the unemployment rate proved irresistible, despite a modest decline in the rate of growth in av. hourly earnings.

In our mind this will provide sufficient ammunition for the US Fed to remove “patience” from their statement at their next meeting and undertake an initial rate hike in June.

Fed member Lacker stated at the start of the weekend that “June would strike me as the leading candidate for liftoff”.

Fed funds futures now price a Fed funds rate at 0.575% by year-end (previously 0.50%). US 10-year yields initially gapped from 2.10% to 2.18%, then rose steadily to end the week at 2.24%.

Support for Treasuries is now seen when 10-year yields approach the 200-day moving av. at 2.31%, close to late-Dec highs.

German 10-year yields also rose from 0.35% to 0.40%. AU 10-year bond futures also had a 12 bps move on Friday night.

We therefore expect NZ long-end yields to push sharply higher today.

Otherwise, there is not too much on the data agenda. However, look out today for the LGFA’s announcement of the details of itsWednesday tender. The new LGFA 2027 bond will be on offer.