Global bond sell-off raises long rates sharply. IMF leans on the US Fed who will likely ignore them

By Raiko Shareef

A dearth of market-moving data overnight did not materially prevent further ructions in European bonds, where volatility remains high.

Local interest rates could not continue to ignore the global environment, and rose sharply at the long end yesterday.

From a starting point of 0.90%, German 10-year bond yield rose to just shy of 1.00%, before falling back to 0.84% at present. While the net move pales in comparison to the +17 bps we witnessed earlier in the week, the range was still significantly larger than seen any other time in 2015.

The US 10-year yield traded through 2.40% overnight before settling back below 2.31%.

In an interesting (but not market-moving development) the IMF recommended that the Fed delay its first rate hike until 2016. In its annual report on the US economy, the IMF downgraded the 2015 growth forecast from 3.1% y/y to 2.5%, citing a strong US dollar and falling oil investment. We doubt this will affect the FOMC’s thinking in the slightest, with the institution more touchy than usual about its operational independence.

The NZ interest curve steepened yesterday, as the sell-off in global bond yields encourage steep rises at the long-end. The 10-year swap yield closed 12 bps higher at 4.09%. With the 2-year swap posting a much more contained 4 bp rise, the 2s10s curve steepened up to 72 bps. With expectations of a lower OCR likely to prevail even if the RBNZ does not cut rates next week, we maintain our view that the curve will steepen back above 75 bps, as the US 10-year bond yield trades up to 2.50%.

There is nothing on the local agenda, and we expect a subdued session ahead of the US employment reports tonight.

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Raiko Shareef is on the BNZ Research team. All its research is available here.