Despite the chorus of Fed speakers talking up the need for even more 2017 rate hikes, markets are sceptcal, especially for the longer term

By Doug Steel

US 10-year Treasury yields are down nearly 5 bps, closing in on 2.36% as the prospect of a large fiscal expansion dims. Lower oil prices, with WTI down around 0.5%, played with the grain of lower yields.

The US curve continues to flatten with US short end yields more resilient falling less than 1 bp overnight.

This fits with the recent trend in positioning, where re-positioning in US Treasuries has been focused in the longer end of the curve (lightening up on longer end shorts) with investors largely holding net shorts in 2y and 5y paper. The resilience of short end yields aligns with market expectations for further Fed action this year.

While re-positioning should support bonds, on its own it is unlikely to be the cause of US 10-year Treasury yields breaking the lower end of its 2.30% to 2.60% trading range. We suggest that a break below recent range lows needs either an event, the Fed to change its tone or the data to start to alter investors outlook.

Comments from the Fed’s Evans suggested no change in tone. Indeed, the usual dove was rather upbeat noting that the US is probably at full employment and two to three hikes this year are probably appropriate and even that four hikes are possible this year if ‘things really take off’. The market awaits the Fed’s Kaplan later this morning, ahead of a speech from Fed Chair Yellen tomorrow although with now Q&A it is unlikely to contain any new news (among many other Fed speakers this week).

NZ yields closed down across the curve yesterday, with a flattening bias as long end yields were marked lower as the implications of the changing US policy landscape were contemplated.

The NZ 5-year swap yields fell nearly 4 bps closing at just over 2.89%. This is below technical support at 2.91% and outside the 2.90-3.10% range that has prevailed all year. This move is stemming from offshore forces with moves overnight likely to maintain that theme today (with little on the data calendar).

Meanwhile, NZ 2-year swap is comparatively anchored by stable OCR expectations. NZ-2-year swap fell 2 bps to close at 2.295% yesterday.

Doug Steel is a senior economist at BNZ Markets. All its research is available here.