By Raiko Shareef
NZ swap yields fell by 2bps across the curve yesterday.
The rally was more reflective of that seen in US government bonds the night before, rather than a rather solid NZ retail sales report.
The 2-year swap yield closed 2bps lower at 3.99%.
Overnight, government bond yields fell sharply, led by a 10bp fall in the UK 10-year to 2.58%.
The US 10-year benchmark dropped by 7bps to 2.54%, a new 2014 low and the lowest since October last year.
Mounting expectations of a fresh round of ECB easing in June, along with unwillingness from both the US Fed and Bank of England to signal rate hikes, appears to be the primary driver of this squeeze lower in year.
The fall in US bond yields came despite a punchy inflation report released overnight.
US producer prices jumped from 1.4% y/y to 2.1% in April, the fastest pace in two years. Some analysts expect this will drive core consumer inflation above 2.0% in short order. That will certainly get the Fed’s attention.
Mounting inflationary pressure will force it reassess its outlook for low rates, and may prompt the market to price in a higher chance of rate hikes by the middle of 2015.
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