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Europeans lead rates lower. US bond traders see Fed changing its tune. Local markets see hikes coming later in year, with inflation stirring

Bonds
Europeans lead rates lower. US bond traders see Fed changing its tune. Local markets see hikes coming later in year, with inflation stirring

By Jason Wong

Global bond yields continue to see downward pressure as short positions built up late last year continue to unwind.

In the key European bond markets, 10-year yields were down 5-8 bps. Germany’s 2-year rate continues to fall to record territory and is now just a few bps away from hitting minus 1.0%.

This dynamic is feeding through into lower US Treasury rates, which saw falls across the curve, with the 2-year rate down 4 bps to 1.14% and the 10-year rate down 6 bps to 2.31%.

The bottom of the 2.30-2.60% range for US10s is now threatened.

The 10-year rate hasn’t closed outside this level since late November.  Despite the strong run of US economic data and the Fed’s FOMC minutes showing many Fed officials seeing another rate hike “fairly soon”, the market remains unconvinced that the Fed will hike rates as soon as next month. A Bloomberg survey of 23 Fed primary dealers showed that for expectations of the next Fed rate hike only 1 called for March, 3 called for May, 17 called for June and 2 called for September.   CME Group’s calculation shows Fed Fund futures pricing in only a 27% chance of the Fed hiking in March.

The local rates market is following global rates lower.

On Friday, NZ’s 10-year bond closed down 2.5bps to 3.235%.  The swap curve flattened a little with the 2-year rate down 1bp to 2.32%, its lowest close since mid-December, and the 10-year rate down 3 bps to 3.465%.

We expect to see support for the 2-year rate around the 2.30% mark, with the market likely to maintain its expectation for possible NZ rate hikes from late this year and into next year.

Amidst a plethora of local data this week, the highlight will be the ANZ business outlook survey. This is expected to continue to show robust levels of business confidence and a further nudge up in inflation expectations.

Daily swap rates

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

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1 Comments

What is the opinion of you Interest commenters on investing in bonds now? Buy them cheaper and hope the value increases, sell what ones you own or stay away from them?

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