US Treasury yields continue to fall, with the 10-year rate down 7bps to 1.88%, close to its lows for the day.
With yields on more than US$7.1 trillion of global sovereign bonds in negative territory, investors are reaching out for yield and US Treasuries remain attractive on that basis.
The prospect of further Fed tightening this year is also diminishing by the day. Dec-16 Fed Fund futures are priced at 0.535%, just 0.155% above the current rate. The first full 25bp tightening is now not priced in until May 2017.
The RBA left its cash rate at 2% and maintained a mild easing bias. The forward-looking policy statement was re-written to “Over the period ahead, new information should allow the Board to judge whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand. Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand”.
There was much dissecting of the new language, but at the end of the day the RBA looks set to keep policy unchanged unless some new, significant information comes along that warrants further easing.
Locally, the 2-year swap rate was up 2 bps to 2.62% yesterday, with yields up slightly across the bills futures strip. With no news, this was just a matter of traders and investors making small adjustments to positions. 10-year swap was down 1 bp to 3.40%.
NZ government bond rates were lower across the curve, a catch-up from previous offshore trading sessions. The Apr-27 bond closed at 3.18% and looks likely to head lower today, following offshore moves. The lowest yield this bond has closed at is 3.15%, back in August 2015 and March 2015. That barrier could well be breached today.
Like the US, NZ’s high government bond yields stand out compared to the negative or sub 0.5% rates available in Europe and Japan.
Coming Up
NZ labour market data will be keenly watched. Employment should show a bounce-back in Q4, the question is how much? The risk is that the unemployment rate doesn’t rise, as the market thinks, reinforcing the view of RBNZ on hold for now. Wage inflation is expected to remain well-behaved. The Governor’s speech soon after should display the same tone as the January OCR Review. Furthermore, expect some defensive posturing with regards to the bank’s monetary policy record as well, with more focus on core inflation than headline.
Overnight, ADP employment for January is expected to be lower compared to December, while the ISM non-manufacturing index is expected to fall slightly.
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