Global bond rates are higher, led by a sell-off in Germany rates, as Reuters reported that the ECB is looking at ways of lending out more of its sizeable and growing pile of European bonds.
Before that report, German's 2-year rate had fallen to a record low of minus 0.75%, trading well below the ECB deposit rate of minus 0.4%, indicative of scarcity issues in the repo market. The repo market is an important source of liquidity for financial markets and any freeze here can be self-defeating towards the ECB's goal of maintaining a stimulatory policy environment. Germany's 10-year rate ended the day up 5 bps to 0.26%.
The rise in Germany rates fed through into higher European rates and ongoing concerns about Italy's banking sector didn't help sentiment. The UK 10-year rate rose by 9 bps to 1.45% as the UK Chancellor indicated an intent to borrow more – an increase of £122b by FY2021 - to increase spending.
With this backdrop, US Treasury rates are also higher, with economic data adding to the negative bond market sentiment. The final reading of US consumer sentiment was revised higher, suggesting that confidence had increased post the US election, while durable goods orders were also stronger than expected. Fresh highs were reached across the curve, with the 2-year rate currently up 4 bps to 1.13% and the 10-year rate up 5 bps to 2.36%. The FOMC releases minutes of its November meeting at 8am this morning, but they shouldn't impact the market, which is now fully priced for a 25 bps rate hike next month.
The local rates market sold off yesterday and there will be further upward pressure on yields, after last night's price action. The short end of the curve remains anchored by expectations of the OCR remaining at 1.75% through next year. The 2-year swap rate was up just 1 bp to 2.26%, while the 10-year rate rose by 4.5 bps to 3.27%. The bond market performed worse, with rates up 6-8 bps at the long end of the curve, ahead of DMO issuing $150m of 2033 bonds today.
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.