US 10-year yields spike following oil price higher but then pull back. NZ rates rise and steepen

By Kymberly Martin

Steepening of the NZ curve continued yesterday.

Overnight, US 10-year yields spiked above 2.30% before declining to trade at 2.19%.

NZ swaps pushed higher from the open following the previous night’s offshore moves.

Most pressure was felt at the long-end of the curve where 10-year closed up 6 bps, at 4.02%. This has taken the 2-10s swap curve to 56 bps. This is around the level we have long targeted for H2.

Having reached this level a little sooner than anticipated we expect some consolidation is now due. This will likely occur if RBNZ rate cut expectations start to stabilise at current levels (circa 36 bps for the year ahead) and US long-yields fail to break higher.

In this regard, overnight moves were of particular interest. In the absence of key data points, US yields appeared to trade with the global oil price.

Last evening, US 10-year yields pushed sharply higher as the WTI oil price pushed above US$61/barrel. Yields briefly spiked above 2.30%, their highest level since early-Dec.

However the move proved a bridge too far as the oil price then started to come off in the early hours of this morning. The WTI price is now down 3.5% and US 10-year yields have fallen back to 2.19%.

The next test will be tonight’s US payrolls data. After such a sharp rise in long yields in recent days, the risks are now tilted toward the data simply meeting or undershooting expectations, resulting in a pullback yields. However, we continue to target 2.50% on the US 10-year by year-end.

Today, in the absence of domestic data releases the market will be somewhat in limbo ahead of tonight’s US payrolls data.

This afternoon’s RBA statement on monetary policy may gain some passing attention. Following yesterday’s AU employment report the market prices around a 50% chance of a further RBA cut by year-end.