Eyes on the wages component of the US non-farm payrolls report. US yields testing lows now but will head back up as Fed hikes

By Kymberly Martin

NZ swap and bond yields closed down 2-7 bps yesterday, with a flatter curve.

Overnight, US 10-year yields have drifted down to 1.75%.

NZ 2 and 10-year swap closed at 2.22% and 2.92% respectively, taking the 2-10s curve back to 70 bps. On a move below 65 bps we would look to position for steepening. Our core view remains that the relatively tight 60-95 bps range that has held for the past year will ultimately be broken to the upside.

It was announced yesterday that current RBA deputy, Phil Lowe, will take over Stevens’ position as Governor from September this year. Unless conditions change significantly between now and then, he will inherit the position with the AU cash rate and inflation readings at historic lows. Currently the market also prices that the cash rate will be cut further, to 1.50% within the year ahead.

In relatively quiet markets, US 10-year yields have traded lower in the early hours of this morning, along with a pullback in the global oil price. Yields now trade around 1.75%.

As previously highlighted, we would not be surprised to see yields revisit early-April lows around 1.70% near-term. However, we anticipate as the year progresses and the Fed delivers further rate hike(s) (currently under-priced by the market), US yields will head back to where they traded entering this year i.e. above 2.30%.

Today the RBA will deliver its statement on monetary policy. This follows its rate cut earlier in the week.

Tonight it will be all eyes on the US employment report. The hourly earnings number may gain greater attention than the headline payrolls number as a pointer to how future Fed policy may unfold.

Kymberly Martin is on the BNZ Research team. All its research is available here.