US rates are higher across the curve, with 2-year Treasuries up 3 bps to 0.86% and 10-year Treasuries up 4 bps to 1.76%, both probing 4-month highs.
There have been no economic data to trigger the move, but with the US bond market closed for Columbus Day holiday yesterday, the move reflects developments since the weekend, including the US Presidential debate and the lift in oil prices yesterday.
Higher oil prices help lift inflation expectations and a Clinton victory looks more assured, seeing the odds of the Fed hiking rates by December raised to 80%.
European rates fell, with the UK 10-year down 4 bps to 0.98% and Germany’s 10-year down 3bps to 0.02%. It’s worth keeping an eye on these, namely Germany, as US bond rates are unlikely to go up in isolation, especially when the US-Germany 10-year spread is already looking stretched.
The local curve steepened yesterday. Global forces put upward pressure on the longer end of the curve, while the short end was influenced was the RBNZ’s McDermott’s speech.
The policy message within the speech was the same as that espoused at the September OCR Review, namely “… our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range”. This really should have come as no surprise to the market, but some traders have recently lost conviction in a November rate cut, owing to the weaker NZD, solid run of domestic data and higher oil prices. We think that a 25bps cut in November remains the most likely course of action, and the OIS market has that priced as a 76% chance.
The 2-year swap rate ended the day down 2 bps to 2.06%, with McDermott’s speech the key driver. The 10-year swap rate ended 1 bp higher at 2.64%.
The calendar ahead is fairly light. The US Fed’s Dudley gives a “fireside chat” early tomorrow morning and the FOMC minutes are due 7am tomorrow morning.
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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