US Fed chief likely to keep alive 3 rate hikes in 2017. Markets sceptical. UST yields rise. Local wholesale rates likely to stay in a tight range

By Jason Wong

There might be signs of nervousness in the US bond market ahead of Yellen’s testimony tomorrow. 

Just 9 bps of tightening is priced into the OIS curve for the March meeting, or about a 36% chance of a hike.

We don’t think her comments will sway from her previously espoused position of expecting three rate hikes this year and a gradual, cautious approach to policy. 

Yellen will want to keep open the possibility of a March hike, with plenty of data still be come between now and then to aid the decision.

With that backdrop Treasury rates are higher across the curve, albeit a modest 1-3 bps.  The 10-year rate sits at 2.43%, up 3 bps for the day and close to the middle of the circa 2.30-2.60% trading range that has developed over the past few months.

In the local rates market yesterday there wasn’t much yield movement, with the swap curve unchanged throughout and the government bond curve a couple of bps higher at the mid-long end.  The 2-year swap rate of 2.35% seems pretty fair to us. 

As the year progresses, the RBNZ’s view of rates-on-hold for the next 2-3 years is likely to be challenged as domestic inflation pressures increase. The market shares the same view, so the 2-year swap rate is likely to find payers emerge on any slippage below 2.30%.

A tight 2.30-2.40% range could well prevail over coming weeks, but as the year progresses and we get closer to the timing of the first hike, then 2.50% is likely to be retested at some stage. That might be several months away though.

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