International bond yields touch historic lows as inflation pressures evaporate resulting in a bond price boom

By Kymberly Martin

The long end of the NZ curve followed offshore moves lower yesterday.

Overnight, US 10-year yields dropped to 1.89%.

NZ 10-year swap declined a further 5 bps yesterday to trade at 4.01%. This is its lowest levels since May 2013.

Recall at that time the OCR was still at 2.50%, while now it is at 3.50%. Consequently the swap curve has flattened significantly.

This will likely prompt increased interest from corporates to extend hedges out the curve, as they reassess their position in the new year.

Meanwhile 2-year swap remains firm at 3.80%, the bottom of its range of the past year. With the market already pricing little in the way of RBNZ action in the next two years the market would need to start pricing rate cuts in order for 2-year swap to drop much from current levels.

We do not envisage the RBNZ cutting from current levels.

However, we must consider the possibility the market moves to price this outcome. This is particularly true given our forecasts for Q4 2014 and Q1 2015 CPI. These currently stand at just 0.8%y/y and 0.3% respectively, well below the bottom of the RBNZ’s 1-3% target band. The former is due for release in a fortnight.

Overnight, as the global oil price continued its plunge, US and German yields fell. UST 10-year fell from 2.03% to 1.89% while German equivalents touched new historic lows close to 0.44%.

This should exert further downward pressure on the long-end of the NZ curve today.

This afternoon the ANZ commodity price index is due. Tonight it will be all eyes on the Eurozone as Dec CPI is released along with German retail sales and unemployment data.