Reuters reported that at its recent meeting ECB policy-makers discussed four QE scenarios and agreed that the next step was to cut stimulus and this should be done with the broadest possible consensus. Options included buying €40bn or €20bn of assets per month (down from the current €60bn) and extension options included 6 or 9 months. This new detail put a little upward pressure on German bond yields and the 10-year year ended up 1bp to 0.31%.
That report on the ECB had some spillover effect onto US Treasuries. Just after the NZ close, the US 10-year rate slumped to a low of 2.015% before it reversed course, reaching as high as 2.07% and closing the week at 2.05%. Speculative traders might well be long US 10-year futures, expecting lower rates, but the analyst community thinks otherwise. A Bloomberg survey showed that out of 58 respondents, the median 10-year rate for the end of the year was projected to be 2.48% while the lowest forecast in the market was 2.05%.
The local rates market showed a flattening bias, with the 2-year swap rate steady at 2.15% while the 10-year rate fell by 4bps to 3.04%, a fresh low for the year. We’ve seen some corporates paying interest in rates as they fall to fresh lows, but this has been overwhelmed by global forces. We’re on board with the Bloomberg consensus, which on fundamental grounds suggests that the bias for rates is skewed to the upside.
The lack of the predicted missile test from North Korea might inject some positive sentiment into the market as the new week begins. It remains to be seen how devastating Hurricane Irma will prove to be but initial reports aren’t great, with parts of Miami under water. On the economic front, the key release will be UK CPI data tonight ahead of the BoE meeting later in the week.
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Jason Wong is on the BNZ Research team. All its research is available here.
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