Yields rise dramatically in Germany, then Wall Street, as investors fret about the ECB's options. NZ rates rise in sympathy

By Raiko Shareef

The rout in European bonds extended overnight, with German 10-year bonds seeing their worst two-day performance since the euro-area was formed.

The NZ rates curve steepened, as long-end rates rose in sympathy with global peers.

German 10-year bond yields are up by another 17 bps to 0.88%, punching clear through the previous 2015 high of 0.78%.

ECB President Draghi’s comments at last night’s press conference, while cautiously constructive on the economy, cannot be solely blamed for the sell-off. Continued speculation that the ECB will have to trim its QE programme, and an understandable lack of investor appetite to stand in front of current momentum, were the more important drivers.

The sell-off in Europe saw US Treasury yields lift in sympathy, with the US 10-year bond yield briefly trading above the previous 2015 high of 2.36%. It has returned there at the time of writing.

Long-end NZ interest rates moved to reflect these global moves, with the 10-year swap rate up 8 bps to 3.97%. The short-end of the curve remains pinned down ahead of the RBNZ’s 11 June MPS.

Yesterday morning’s poor dairy auction result gave some succour to the rate-cut camp, helping the 2-year swap yield fall 2 bps to 3.33%. This was despite a 6 bp rise in the Australian equivalent, in response to a better-than-expected Q1 GDP result.

The torrent of data eases today, with the local Building Work report and Australian retail sales due to pique our interest.

We imagine a fairly contained mood, ahead of the US employment reports tomorrow.

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Raiko Shareef is on the BNZ Research team. All its research is available here.