Financial markets sceptical that any of the FOMC, the RBNZ or the RBA will alter rates soon, either up or down

By Jason Wong

US Treasuries traded in a tight range on Friday, with the 10-year rate closing down 1 bp at 1.84, consolidating the rise in yields earlier in the week.

The overall increase for the week was a rise of 14 bps, taking yields back to levels seen at the beginning of the month.

Most of the damage was done after the release of the more hawkish than expected FOMC minutes on Thursday morning, NZ time.  By week’s end the US OIS market had priced in a 30% chance of a 25 bp rate hike in June and 51% by July.  At the beginning of the week, these probabilities were 7% and 19% respectively.  However, a full 25 bps hike is still not priced in by year-end, suggesting that upward pressure on yields could remain if the data cooperates.  A number of Fed speakers are on the circuit this week, including Chair Yellen on Friday, with the market interested in where her view sits relative to the tone of the FOMC minutes.

Local trading on Friday saw the NZ curve flatten, with longer rates down slightly on offshore forces and short term rates slightly higher as the market continues to gradually wind back expectations of easier NZ monetary policy.

The OIS market prices the June meeting at 2.185%, implying just a 26% probability of a 25 bp OCR cut.  This is the lowest probability priced in since a month ago.

With further Fed tightening in the market’s sights and the RBA probably not looking to cut rates again in June or July, local traders have lost some conviction in prospects for the RBNZ delivering another rate cut soon.  One now has to look to the February 2017 meeting before a full 25 bps cut is priced in.

NZ’s 2-year rate closed up 0.5bps to 2.29%, the highest daily close in nearly three weeks, while the 10-year rate closed down 3 bps at 2.91%.  Locally the Budget on Thursday will be the highlight, although is not expected to be market moving.  More interest lies in the Parliamentary debate straight after the Budget which is always entertaining.