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Falling local yields expected to continue, driven by lower house price inflation, weak food prices, and slipping global rates

Bonds
Falling local yields expected to continue, driven by lower house price inflation, weak food prices, and slipping global rates

By Jason Wong

Global bond yields are lower, with US Treasuries in the driving seat for a change.

The US 10-year rate fell by 5 bps to as low as 2.30% after Yellen’s testimony was published, but it has since settled at 2.32%, down 3 bps from the NZ close. 

Lower global rates have seen a reversal of recent yen weakness, with USD/JPY down 0.6% to 113.25.

All eyes now turn to Friday night’s US CPI report, where we’ll either get confirmation that recent inflation weakness was temporary (bearish for bonds) or that inflation headwinds continue (bullish).

NZ rates were down 2-3 bps across the curve, supported by lower US rates in the previous session.  The 2-year swap rate closed at 2.30% and the 10-year rate closed at 3.375% and further downside pressure can be expected today.

This morning REINZ data are expected to continue to paint a picture of a weaker housing market, with falling sales and lower house price inflation.

The food price index will allow us to firm up our CPI pick for next week, which is looking to come in soft at 0.1% q/q and 1.8% y/y. These indicators lend support to our view that the RBNZ will remain decisively neutral over coming months.

Tonight, Yellen will repeat her testimony to a Senate panel but will face a different barrage of questions.

Daily swap rates

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

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