US Treasury rates are slightly down for the day, with much of the support following the Fed’s Brainard reiterating her dovish stance on rates.
She urged “prudence in the removal of policy accommodation” and that the “case to tighten policy pre-emptively is less compelling”.
These comments followed two other Fed speakers. Lockhart repeated his call for a “serious discussion” about raising interest rates later this month, even after some recent disappointing economic indicators. However he added that he didn’t “feel that we are incurring the costs of patience that put a lot of urgency on the question of raising rates”. Kashkari said he saw no urgency to act and preferred to see a more upward movement in core inflation.
This lack of urgency to raise rates sees market pricing of Fed rate hikes diminish, with the September meeting priced at just 5 bps or a 20% probability of a 25 bp hike, down from circa 30% on Friday. The probability of a hike by December has nudged down to 68%.
The US 2-year rate is down 1 bp for the day to 0.77%, although the fall has been 3 bps since Brainard spoke. The 10-year rate is trading at its lows for the day at 1.66%, having tested, and rejected the 1.695% level a number of times during the night.
Prior to the rally in US bonds, other markets have seen further increases in yields, with Germany’s 10-year rate up 3 bps to 0.035%, its highest close since the Brexit vote and Japan’s 10-year rate continues to rise towards positive territory, closing at minus 0.01%.
Friday night’s bear-steepening was transmitted to the NZ yield curve yesterday, with the 2-year swap rate up 3.5 bps to 2.045% and the 10-year swap rate up 8bps to 2.57% NZ government rates showed even larger moves, with the 10-year rate (2027) up 11 bps to 2.435%.
Despite the recent sell-off in outright yields and spread to US, we believe that the fundamentals for NZ bonds remains supportive. From a current spread of around 78 bps, we see compression in the NZ-US 10 year rate to below 50 bps in the months ahead.
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Jason Wong is on the BNZ Research team. All its research is available here.
1 Comments
The 10-year rate is trading at its lows for the day at 1.66%, having tested, and rejected the 1.695% level a number of times during the night.
Hmmmmm....
It is the paralyzing “paradox” that plagues what used to be known as “forward guidance.” In other words, if “stimulus” actually worked, the bond market would price that as higher rates; not lower. When the economy actually does recovery (some day in the distant future, a point in time that will be determined by monetary reform not typical market gyrations) the UST curve will rise and steepen. Read more
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