Safe haven bond buying sees US yields slip despite better-than-expected data being reported

By Kymberly Martin

NZ swaps closed down 1bps at the short-end and 4bps at the long. Overnight, US 10-year yields drifted lower to 2.64%.

We see continued pressure being placed upon short positions in the swap market. We opened the day down a point across the curve, as fears regarding deterioration in the current situation in Ukraine weighed on the market.The mid-curve was also dragged down by continued issuance, this time in the form of $400m of Rentenbank bonds.

The weak Australian private CAPEX numbers also added downward pressure on the curve, despite solid domestic data in the form of a higher than expected trade balance.

Overall 5-year swap closed down 3bps at 4.46% and 10-year down 4bps at 4.99%. The 2-10s curve has flattened to its early-February lows of 119bps. In coming months we expect further flattening of this curve as OCR hikes get underway. We expect a first 25bps hike on 13 March.

Across the Tasman the market has increased its pricing of the probability of a further RBA rate cut (to 25%) in the wake of yesterday’s capex numbers.

Overnight, Fed Chair, Yellen gave her postponed address to the Senate. She expressed commitment to continue with the process of ‘tapering’ asset purchases despite recent softness in US data. She seemed prepared to lay the responsibility for recent weakness at the feet of “unseasonably cold weather”.

However, US Treasuries appeared to be driven more by a ‘safe haven’ bid due to uncertainty surrounding the situation in the Ukraine. US 10-year yields slipped from 2.67% to 2.64% despite a stronger-than-expected US durable goods orders release.

Today the domestic highlight will be the release of the ANZ business confidence survey. Here the greatest news may be in the inflation indicators, especially as the RBNZ has recently noted that “firms pricing intentions have been rising”. Any signs of building price pressures could help arrest the recent gradual drift lower in NZ short-end yields.

Tonight, the focus will be on the second reading of US Q4 GDP, the Chicago PMI and University of Michigan Confidence survey (both for February) and US Pending home sales (January).