New Zealand gets a "good old-fashioned bond selloff" and swaps get significant bear-steepening, following sharp changes on Wall Street

By Jason Wong

US Treasuries continued to sell off on Friday.

The yield curve bear-steepened, with the 2-year rate up 2 bps to 1.07% and the 10-year rate up 5 bps to 2.35% – its high for the day and the highest close since December 2015.

The NY Fed’s Dudley was keeping an open mind about the new fiscal policy environment. He told reporters, “…we have a change in expectation about the policy, but how the policy actually shifts, that remains to be determined. It’s pretty important not to jump to a conclusion here before the policy gets set”. Clearly, the market isn’t prepared to take such a sanguine view at this point and is betting that Trump’s policies will lead to more debt, higher inflation, and tighter monetary policy.

Higher bond rates are feeding through into higher mortgage rates. The US 30-year mortgage rate hit 4.125%, its highest level since July 2015 and up more than 0.5% since election day.

European rates were better behaved with Germany’s 10-year rate steady at 0.27%. In a prepared speech, ECB President Draghi suggested that the euro area’s economic recovery “remains highly reliant on a constellation of financing conditions that, in turn, depend on continued monetary support” and added that the ECB “cannot be sanguine over the economic outlook”.  The comments certainly gave no hint of a possible tapering of the ECB’s asset purchases, a decision that the market keenly awaits at the early-December policy meeting.

On Friday, NZ’s bond market suffered a good old-fashioned selloff, a reflection of the global forces and positive domestic releases. The 10-year government bond rate rose by 10.5 bps to 3.09%, unwinding the previous day’s fall. The swap curve showed a significant bear-steepening, with the 2-year rate up 4.5 bps to 2.265% and the 10-year rate up 11 bps to 3.28%.

Jason Wong is on the BNZ Research team. All its research is available here.