Moody’s warns the US sovereign credit rating remains vulnerable to downgrade if projected rise in debt levels is not addressed

By Kymberly Martin

NZ yields closed up 5-8bps across the curve, following the offshore lead. NZ 2-year swap closed up 5bps, at 2.89%, still within the fairly tight range it has traded for the past couple of months. 

The market now prices close to a 50% chance of 25bps hike from the RBNZ in the year ahead. The 2-10s swap curve has steepened, closing at 108bps.

NZ bond yields also rose 4-5bps across the curve. NZ 10-year yields now sit at 3.40%, relative to US and AU equivalents at 1.96% and 3.22% respectively.

Overnight, US 10-year bond yields traded a range between 1.92-1.97%. Evans, first of the US Federal Reserve members to make comments this week, said he was optimistic the US labour market was doing much better.

However, he was suitably vague about the potential timing for tapering asset purchases. Chairman Bernanke’s comments early Thursday morning remain the more important commentary this week.

Rating agency Moody’s warned overnight that the US sovereign remains vulnerable to a rating downgrade, if policy makers do not address the projected rise in debt levels in the decade ahead.

This is despite a projected decline in the budget deficit to $378b by 2015 from a peak of $1.4t in 2009. However, a downgrade would only align the US rating with that already subscribed by agency S&P.

Today’s RBNZ survey of expectations will be interesting for what it reveals about current inflation expectations. While current actual inflation readings sit below the 1% lower band of the RBNZ’s target range, 2-year-ahead expectations were around 2.2% at last reading.

We expect house price inflation expectations may also have moved even higher.

Today the RBA also releases its May minutes. The market will be looking for the Bank to confirm it maintains an easing bias, after its most recent 25bps cut.

The market prices at least another 25bps cut in the coming 12 months which is consistent with our NAB colleagues’ view.

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