The NZ curve flattened yesterday, following offshore moves.
US short-end yields trade somewhat lower this morning.
NZ swaps and bond yields traded lower yesterday on the back of offshore moves, in the absence of domestic data releases. NZ 2-year swap closed down 3 bps, at 2.84%, having touched intra-day lows of 2.83%, their lowest level since May 2013. We continue to see 2-year swap trading down to 2.70% in the months ahead as the RBNZ cuts the OCR to 2.50% by its October meeting. This is ahead of market pricing that sits at around 2.68% for Oct.
The NZ swap curve flattened as 10-year swap closed down 8 bps, at 3.58%. The 2-10s curve now sits at 74 bps, at the lower-end of the 70-125 bps range we see through to year-end. However, if we are not to break lower near-term, we will need to see US 10-year yields stabilise after their recent sharp falls.
Yesterday afternoon, US 10-year yields gapped lower, as the USD/CNY opened another 1.4% higher, in line with the PBOC’s newly stated policy objectives. However, from early evening lows below 2.05%, US 10-year yields have climbed higher to sit at 2.13% this morning.
However, the impact on short-end US yields has been more enduring. US 2-year yields sit around 3 bps lower at 0.64%. Fed fund futures for Dec 15 now sit just above 0.30%, from above 0.34% a week ago. The market questions whether current market jitters might be sufficient to delay the first Fed hike.
Last evening RBA’s Deputy Governor, in his speech, stated that lower interest rates were helping the AU economy transition. However, he also highlighted the risks associated with ever-rising house prices. These comments will no doubt strike a chord with counterparts across the Tasman.
Kymberly Martin is on the BNZ Research team. All its research is available here.
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4 Comments
Phil Lowe (RBA) has done his bit for the 'all we have to fear, is fear itself' mantra. His speech perhaps illustrates the start of 'batten down the hatches!' approach, that at some stage all captains of a ship should make when danger is imminent, regardless of how they previously tried to keep the passengers calm in the meantime.
National Wealth, Land Values and Monetary Policy
He seems to be advocating asset bubbles foster consumption, thus reinforcing trickle down economics - I thought that nonsense had been thoroughly discredited with stark evidence to the contrary?
There is a well-established research literature empirically demonstrating that higher housing wealth boosts household consumption. For example, work done by my colleagues at the Reserve Bank of Australia (RBA) has estimated that a rise in wealth of $100 leads to a rise in non-housing spending of between $2 and $4 per year.[11]
There are two commonly accepted channels that explain this relationship.
The first is a pure wealth channel. To the extent that higher dwelling prices are perceived to increase wealth, households should spend a little of that extra wealth each year over their lifetime.
The second is the collateral channel, as higher land prices increase the value of collateral that can be posted by potential borrowers. The increased collateral makes it easier for credit-constrained households to borrow to increase their spending. Similarly, businesses can find it easier to finance projects that previously might have struggled to get finance.[12]
I tried to put Lowe's comments into context against his opening quotes re Shann:
" He was a tireless advocate for market-based policies, including in commodity, labour and foreign exchange markets. .... his writings emphasised the importance of spending public money wisely and the dangers of excessive and poorly designed regulation.....He understood the dangers of excess leverage. He understood the importance of making sure that assets generated a return to cover their financing costs. And he understood the difference between current economic activity and the accumulation of wealth."
Perhaps I'm wrong on Lowe's intentions. But the optimist in me hopes we do see some meaningful changes coming out of the RBA - who in my opinion, have got it horribly wrong since they backtracked on their tightening of monetary policy a couple of years back.
Central bankers are clueless. They think they are "fixing" problems but it's the unintended consequences of their policies that they don't foresee. This fellow seems to understand the situation.
http://www.zerohedge.com/news/2015-08-11/why-fed-bind-scotiabank-explai…
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