Global bonds have been bid, seeing 3-6 bps falls across Europe and the US. Germany’s 10-year rate is down 3.5bps to 0.25%.
The US 10-year rate has reached a fresh low for the year of just under 2.13% and is currently down 4 bps for the day at 2.14%. Technical factors might be in play, with the yield breaking decisively below the 200-day moving average of 2.18% and the “charts” showing a big gulf to the next main area of technical interest around 1.80%.
There have also been widespread reports that China is prepared to increase its holdings of Treasurys under the right circumstances, with officials seeing them as more attractive than other sovereign debt and as the yuan stabilises.
The only data release of interest was US job openings rising to a record high in April, while hirings eased again – a sign of a tight labour market, with jobs plentiful but a shortage of qualified labour, and consistent with an unemployment rate at a 16-year low of 4.3%. Bond traders seem prepared to put aside this economic development, given the surprising lack of wage pressure to date from a very tight labour market.
However, that means the bond market will be highly sensitive to any positive inflation news that would give more clarity to the Fed’s policy track ahead.
The local rates market saw falls across the board yesterday, a reflection of the global forces seen during the trading session.
Swap rates were down 2-3bps across 2-10 year maturities, closing at fresh lows for the year.
A development we’re keeping our eye on is the fall in the 90-day bank bill rate, which fell to a record low of 1.94%. Contracting short rate spreads (LIBOR-OIS) in the US are likely behind this move.
A lower US LIBOR-OIS spread and 3-month NZD basis swap makes it more attractive for local banks to raise short term wholesale funds offshore relative to issuing local bank bill paper.
Further downside to NZ’s 90-day rate would encourage receiving interest in 2-year swap and take that rate lower as well.
Add in an RBNZ on hold for an extended period and the conditions are ripe for further downside pressure in short term interest rates.
Daily swap rates
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Jason Wong is on the BNZ Research team. All its research is available here.
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