US 10-year yields fall to all time low of 1.44% on release of US retail sales data

By Kymberly Martin

There was a small bounce in NZ yields yesterday. Overnight, global ‘safe-haven’ yields slumped toward lows, in the backdrop of muted risk appetite.

NZ swaps closed up 2.5bps across the curve yesterday. Critically, the 2s-10s curve remains right on 101bps, just above its key support level.

However, overnight US 10-year yields fell further, aided by the release of disappointing US retail sales data. Yields found support at their all-time lows of 1.44%. This suggests downward pressure on the long-end of the NZ curve at the open today, ahead of the NZ Q2 CPI release later this morning.

We and the market expect annual inflation to drop to a 1.1-1.2% level from 1.6% previously.

This release would likely make the market comfortable with its current OCR pricing (-17bps by a year’s time). The market would likely extrapolate a contained inflation trajectory. Short-term yields would unlikely be disturbed.

However, we are mindful that after CPI bottoms in Q3 this year (on our forecasts) inflation will build into next year. We therefore do not expect rate cuts.

The most significant action in NZ bond markets yesterday was a 6bps sell off in NZGB15s. This flattened the bond curve a little as NZGB23s sold off by 4bps, to yield 3.34%.

After the night’s moves in US bonds the NZ-US 10-year yield spread sits at 186bps. The NZ-AU spread is at 41bps. Both spreads have room to narrow within recent ranges.

Today, the RBA releases its July minutes and the Bank of Canada announces its target rate.

In a year’s time the market expects the RBA cash rate to be 100bps lower and that for Canada to be 10bps lower.

We continue to believe market pricing for Australia is too aggressive in its cut expectations. Tonight, Fed’s Bernanke will deliver his Monetary Policy Report to the Senate.