US manufacturing numbers help US 10-year bond yield touch 2.3%; market pricing in 60% chance RBA will cut further; NZ government bonds outperform US Treasuries

By Kymberly Martin

NZ swap and bonds yields pushed higher across the curve yesterday. Overnight, US 10-year yields pushed a little higher to trade at 2.26% this morning.

Despite another weak dairy GDT auction in the early hours of yesterday morning, NZ swaps took their cue from the push higher in US yields.

The move higher in NZ swaps was briefly curtailed by the release of the NZ employment report mid-morning yesterday, but that proved short-lived.

NZ 2-year swap closed up 2bps, at 2.88%. 10-year swap closed up 8bps, at 3.68%, taking the 2-10s curve back up to 80bps.

We continue to look for steepening over the medium-tem, within a 75-125bps range.

NZ longer-dated bond yields also pushed higher yesterday. The yield on NZGB27s closed up 5bps, at 3.33%.

However, long-dated NZGBs have outperformed US Treasuries on the push higher in US yields in recent days.

We think this will remain the case through to year-end i.e. that NZGB-USTs compress on each sharp leg of a sell-off in USTs.

Last night, US 10-year yields continued their push higher, assisted by a stronger-than-expected ISM non-manufacturing release in the early hours of this morning.

US 10-year yields sit at 2.26% this morning, having touched intra-night highs above 2.29%.

The local focus today will be the infamously volatile AU employment report for July.

Ahead of this the market is pricing around a 60% chance the RBA delivers a further 25bps rate cut within the year ahead.

Tonight, the Bank of England is set to meet. No change to its policy rate of 0.50% is expected.

However, the market continues to expect that the BoE will be the next Central Bank to hike after the US Fed. Current market pricing sees the BoE’s cash rate at 0.80% by this time next year.

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Kymberly Martin is on the BNZ Research team. All its research is available here.