After reaching 4-month highs yesterday we saw US Treasury yields fall a little after the FOMC September meeting minutes were released and we saw yields fall further during the Asian trading session.
The 2-year rate is down 2 bps to 0.83% and the 10-year rate is down 4 bps to 1.73%.
The prospect of the Fed tightening in December is well priced at 76%, according to the OIS market. However, the market is likely thinking about how the Fed will respond, and how its language might change, amidst a tightening in financial conditions over recent months, as reflected in higher long term interest rates and a stronger USD. This could restrain how much further US long term rates rise from here.
The other constraining factor on US long rates is the behaviour of European bond yields. Germany rates fell by 3 bps to 0.04%. There are limits as to how far the market will take the US-Germany 10-year spread, even amidst a US tightening cycle and easy ECB policy.
Lower rates were evident across NZ’s yield curve yesterday, a reflection of global forces. The 2-year swap rate fell by 3.5 bps to 2.045%, while the 10-year rate fell by 6 bps to 2.61%.
NZ’s 10-year bond rate fell by 5 bps to 2.47%. Lower Australian rates, with the large 30-year bond issue now out of the way, was a supporting factor. The release of NZ’s fiscal accounts for FY2016 did no harm. They highlighted the strength of the government’s fiscal position, with an underlying surplus of 0.7% of GDP and net debt of 24.6% of GDP. The risks are tilted towards a reduced bond issuance programme as the fiscal operating position improves further, but the NZDMO will be balancing this off against the desire to maintaining a liquid and functioning NZGB market. Near term support for NZGBs will be bolstered by the payment of circa 600m of coupons and demand at next week’s tender should be strong.
On the data calendar, we’ll be watching China loan data later today, while overnight US retail sales data and a speech from Yellen are the highlights.
Daily swap rates
Select chart tabs
Jason Wong is on the BNZ Research team. All its research is available here.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.