US 10-year yields drift lower. Bond markets wonder if June Fed hike may be delayed. Eyes on RBA minutes

By Kymberly Martin

NZ swaps closed virtually flat while NZ bond yields closed down 2 bps.

Overnight, US 10-year yields drifted down from 2.10% to 2.08%.

It was a very quiet start to the week domestically. Looking back over the past two months NZ 2-year swap has traded a tight range from 3.46% to 3.66%. During this time the market has priced between about 5 bps and 30 bps of rate cuts from the RBNZ for the year ahead.

Currently the market prices around 20 bps of cuts. We still believe markets are likely to move to price increased cuts, on the back of low-side inflation indicators near-term, before eventually rebounding later in the year. We do not see the RBNZ cutting in the year ahead but rather being on prolonged hold.

Overnight, the recent run of generally disappointing US data continued and the WTI oil price declined to its lowest level since early 2009.

US 10-year yields drifted lower to 2.08% while German equivalents traded sideways around 0.27%. Dec Fed fund futures have inched down to price just a 0.5% Fed funds rate at year-end, as the market speculates recent data softness may delay the Fed’s first hike.

We continue to see June as the most likely candidate for a first hike.

Today’s local focus will be the release of the RBA’s March Minutes. Recall at the RBA’s last meeting the Bank left the cash rate unchanged at 2.25%. The market will be looking to see if the Bank discussed cuts at that meeting and for guidance on timing of the next cut. The market currently prices more than a 50% chance of a cut at the April meeting and almost 50 bps of cuts by year-end. Our NAB colleagues see one further cut at the May meeting, though seeing the April meeting as ‘live’.