The US 10-year Treasury rates have drifted higher throughout the US trading session, rising by 7 bps to 1.86%, their highest level in a few weeks.
We doubt the better-than-expected existing home sales data were a factor, with the 5.1% rise following the 7.1% fall the previous month. Recall that housing starts and permits data the previous day significantly undershot expectations.
Higher rates no doubt reflect higher oil prices and improved risk appetite, with US equities reaching record highs on some measures (gross indices which include reinvested dividends) and the VIX index down to 12.7, its lowest level since August.
It was a different story yesterday afternoon during the local trading session. A possible change in monetary policy stance by the PBoC got the market’s attention. Early in the week the state news agency Xinhua reported that “…while monetary policy will maintain a certain degree of looseness in coming months, prudence will feature more prominently than last year”. This was backed up by the PBoC’s chief economist noting that the central bank would be paying attention to heading off macroeconomic risks, especially an over-expansion of corporate leverage.
On this news, equity markets fell across much of Asia and global rates rallied. This helped drive down NZ rates, with the 2-year swap rate down 3.5 bps to 2.25% and the 10-year swap rate down 4bps to 2.93%. NZ government bond yields were down circa 1-2 bps across the curve.
The rise in US rates overnight looks like an outlier in the context of other markets. European rates were lower and a lot of news stories have focused on the continuing decline in Japan’s rates, with the entire yield curve now showing yields below 0.3%, even out to 40-years. Those levels suggest it would be meaningless for the BoJ to increase its purchases of JGBs and a more likely tack would be to introduce fresh measures which encourage banks to lend, like the ECB did, or increase purchases of equities.
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Jason Wong is on the BNZ Research team. All its research is available here.
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