A bout of risk aversion and a surge in the VIX index would normally see global bond markets well supported.
But in this case, concern that the global monetary policy picture is near a turning point meant that the bond market itself, with its unsustainably low yields, was part of the problem.
With the market hooked on cheap money any sign that the rug is about to be pulled is a concern to bond investors.
The sell-off of German bunds continued in the aftermath of the ECB decision on Thursday night, where the central bank showed an unwillingness to provide further stimulus. The 10-year Bunds showed another 7 bps increase, taking it into positive territory at 0.01%, its highest level in a couple of months. Speculation of the Bank of Japan stepping away from its purchases of long and super-long bonds saw a further steepening of Japan’s yield curve and the 10-year JGB at minus 0.02%, its highest close since mid-March.
The rising global rate theme is also being experienced in the US, with the 10-year rate rising by 8bps to 1.67%, its highest level in nearly 3 months. There were 3 Fed speakers on Friday night, with the market focused on Rosenberg’s hawkish comments. Following soft US data, one might have expected a cautious tone from this known dove, but he outlined the case for a normalisation of monetary policy, highlighting the risks of waiting too long. By contrast, the tone of Tarullo and Kaplan was that the Fed could afford to be patient but that didn’t prevent the bond market sell-off, which was already well underway.
Market expectations for tighter US policy didn’t actually change that much, evidenced by the only 1 bp increase in the 2-year Treasury rate and the probability of a September hike priced around the 30% mark. It was the global force of higher European and Japanese rates that appeared to have the most impact on the US Treasury curve.
The steepening force of global yield curves made their mark on the local curve on Friday and we should see more of that in today’s trading. The NZ 2-year swap rate rose by 1 bps to 2.01%, while the 10-year year rate rose by a chunky 7 bps to 2.49%, its highest close in 5 weeks. NZ’s 10-year bond rate rose by 8 bps to 2.33%, a level not seen since mid-July.
Daily swap rates
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Jason Wong is on the BNZ Research team. All its research is available here.
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