NZ swap and bond yields closed down 3-11bps yesterday, with a notable flattening of the curve.
US 10-year yields trade at 2.22% this morning, having shown limited response to US Fed Minutes.
NZ yields fell heavily at the long-end of the curve in response to offshore developments and the lead set by US yields.
The cocktail of uncertainty, that is grinding Greek negotiations, slumping Chinese equity markets and falling global commodity prices, has seen NZ 10-year swap fall 11bps, to 3.72%.
The yield on NZGB27s has also fallen 9bps. The 2-10s swap curve has flattened to 80bps.
There appears to be resistance to 2-year swap trading too much lower at this point, as the market already prices around 60bps of further RBNZ cuts.
This would take the OCR to 2.60%, almost entirely eliminating the 100bps of rate hikes delivered last year.
Yesterday the Aussie iTraxx (a measure of credit default risk) responded to global risks by pushing out to its highest level since Oct 2014.
Still, at 105, it remains well below where it peaked in 2011, above 220. However the measure is worth watching, as one of the best indicators of whether global credit risk will eventually feed through to the likes of wider NZ credit spreads.
Overnight, bond markets were relatively range-bound ahead of the release of US Fed Minutes.
The Minutes showed no sense of urgency in moving toward a first rate hike and highlighted concern for global risks. Those concerns can only have heightened since mid-June.
To offset global risks, domestic US developments will need to be very convincing in coming months to get the Fed to pull the trigger on hikes at the Sept meeting. This will likely need to include further strong US payrolls reports, showing signs of increasing wage price pressures.
The AU employment report will be the local focus today.
NZ short-end yields may follow the direction of any move by AU equivalents, as the market adjusts its RBA expectations. The market currently prices one more 25bps rate cut from the RBA in the year ahead.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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