The global bond market continued to adjust to the more hawkish or less dovish coordinated attempt by major central bank leaders during the week.
Friday’s gain in 10-year bond rates was less than we saw earlier in the week, with 1-2 bps rises across Europe and the US 10-year rate up 4 bps to 2.30%.
More noteworthy is the week’s gains across various markets for 10-year rates as follows: US +17 bps, Canada +30 bps, UK +25 bps, Germany +22 bps, Australia +22 bps, and NZ +25 bps. If rates continue to climb, we’ll look back on last week as a watershed week, a major inflexion point in central bank guidance.
The global bond market sell-off – led by Europe – has had a significant impact on the NZ rates curve, even as the RBNZ hasn’t joined in. Indeed, it was only a little over a week ago that the Bank reiterated its clear “neutral” policy guidance.
OIS pricing now shows a full rate hike is priced in by May 2018, some three months earlier than the market had priced in earlier in the week, and some 18 months earlier than the RBNZ has guided. The 2-year swap rate closed the day 5.5 bps higher at 2.33% and the 10-year rate rose by 9 bps to 3.35%, both at their highest close since the day before the shocking May MPS.
It has been a one-sided market for much of the week and this remains at the whim of offshore market sentiment. The next 25 bps increase in long bond rates won’t happen in a straight line, but that’s where the balance of risk lies over the coming quarter, we suspect.
ISM manufacturing data due tonight is expected to be robust, the next key release on the calendar. A market lull might set in with the US independence day holiday on Tuesday and in the lead-up to Friday’s important non-farm payrolls report. However, with Europe in the driving seat, investors should probably be paying more attention to developments on the other side of the Atlantic, with a couple of ECB speakers due late 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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