Modest reaction by bond and equity markets as Fed fails to deliver further easing

By Kymberly Martin

It was another fairly quiet day in NZ markets. Yields further consolidated recent rises, closing up 1-3 bps.

Market pricing shows that in a year’s time the OCR will be little changed from its current level. We continue to see the first RBNZ rate hike in H1 2012.  2-year swap yields closed at 2.79%.

The 2s-10s swap curve has steepened a little to 96bps. We think the curve is biased to steepen in the near-term from current levels.

Overnight, as the market awaited the US FOMC meeting German 10-year bond yields drifted up from 1.30%-1.38%.

Peripheral European spreads to German bonds narrowed slightly. The Fed announcement provided very little that was different from its June statement.

Referring to the economy, it gave more emphasis to decelerating activity in H1. Elsewhere the statement followed its predecessor almost word for word. Rather than offering any new initiatives, it simply said the committee stood ready to “provide additional accommodation as needed”.

There was also no change in rates guidance, reconfirmed as “exceptionally low levels for the Federal funds rate at least through late 2014”. The vote was passed with one dissenter, Lacker.

This was a bit less from the Fed than the market had anticipated. Still, reactions were relatively modest. The S&P500 has dropped marginally into negative territory.

US 10-year yields gyrated after the announcement, but are now slightly higher at 1.52%.

As further Fed purchases of US Treasuries are not imminent, some release of downward pressure on long-end yields can therefore be seen.

NZ yields response to overnight developments should be relatively contained, though an upward bias to long-end yields is likely. 

The market now awaits the much anticipated ECB announcement tonight. Spain will also return to markets tonight to sell bonds, as a good indicator of current risk appetite.