Yields up with steeper bias; investors move from bonds to equities as risk appetite improves

By Jason Wong

Better risk appetite is taking its toll on the bond market, with yields up across most markets. 

The US 10-year Treasury rate is up a hefty 8bps to 1.51%.  This is a 19 bp move up from the 1.32% intraday low seen six days ago.  A 10-year auction showed waning demand for bonds after recently reaching record low yields.

The yield curve has steepened, with the 2-year rate up by just 3 bps to 0.68%. OIS pricing is showing a slightly better chance of the Fed hiking rates sometime in the future, although still some time away.  The timing of the first meeting with a better than even chance of a 25 bp hike has moved slightly closer, but is still not until March next year and one still has to peer into 2018 before seeing a full rate hike priced in.

The Fed’s Bullard said that Brexit will have a “close to zero” impact on the US economy.  Recall that he earned himself the label of the most dovish FOMC member not so long ago, admitting that he was the ‘dot’ that implied only one more rate hike between now and the end of the projection period.

Germany and UK 10-year bond rates are up in the order of 7-8 bps, to minus 0.09% and 0.83% respectively. Deutsche Bahn AG, a German railway company, became the first non-financial company to sell negative-yielding bonds in euros, as the ECB’s bond buying programme increasingly distorts European credit markets.

As expected, NZ rates were swept up in the global bond sell-off yesterday.  The 2-year swap rate rose by 1bp to 2.24% while the 10-year rate rose by 5 bps to 2.56%.  The overnight moves will impart further upside pressure to rates today, with a further steepening of the curve likely. 

RBNZ McDermott’s speech today will not be market moving, as a Bulletin article on the topic of the speech (how the RBNZ makes OCR decisions) was published earlier this week.  A coin toss isn’t far from the market’s view at present, with not much conviction either way on the Bank’s likely August decision.  A TWI running 9% ahead of the Bank’s projection in combination with no significant change to the economic outlook, leads BNZ economists to believe that an August rate cut is more likely than not.