Rates on hold in a risk-off environment. Low corporate bond issuance. Central banks likely to sit tight

By Jason Wong

The tight trading range for US Treasuries has continued and the 2% mark for the 10-year is proving hard to crack on a sustainable basis.  It is currently up 5 bps at 2.04%.

A downward trend has been at play so far this year, given the risk-off environment.

Further falls are likely to be harder to come by, with dovish expectations already priced in for the Fed this year, just one hike compared to the Fed’s projection of four hikes in 2016.  The Fed is likely to reiterate that it sees scope for a gradual tightening of policy this year. 

The risk-off environment and wider credit spreads has dampened corporate bond supply this year. A report overnight showed that global corporate bond sales had slowed to an 11-year low in January, with $333 bln issued so far this year.

Yesterday, the local rates market was quiet again, as traders held off putting on fresh positions ahead of this morning’s RBNZ statement. The bank bill futures strip sold off ever so slightly and 2-year swap was up 0.5 bp to 2.65%, a small reaction in light of the larger sell-off in the Australian market.  Longer term swap rates fell, a reflection of the moves in US long rates.  The 10-year swap rate was down 3 bps to 3.44%.  The risk this morning is for NZ short rates to nudge up a bit further, as traders are possibly disappointed by the RBNZ’s business-as-usual, watching-and-waiting tone.

Coming Up

The FOMC statement at 8am and the RBNZ statement at 9am will both be keenly watched. In both cases, market pricing is easier than what these central banks have projected, so the market will be looking for some sort of hint that the central banks are moving in the market’s direction.

Neither banks is likely to change its view that much as they await further information.