Yellen worried delaying hikes could inadvertently push US into recession; US bond yields jump on data; higher NZ & US bond yields on the cards but spreads should narrow

By Kymberly Martin

NZ swap and bond yields closed down 1-5bps yesterday. Overnight, US 10-year yields pushed up from 2.15% to 2.19%.

NZ yields drifted lower from the open following the ISM-inspired moved in US yields. Short-dated swaps only nudged 1bps lower, as the market remains reticent to price much more than a 50% chance of a RBNZ rate cut on 10 December. However, 10-year swap fell 4bps, taking the 2-10s curve down to 79bps.

Yields on NZGBs also declined across the curve by 3-5bps, marginally widening swap-bond spreads.

The yield on NZGB 27s now sits at 3.51%. We anticipate higher yields by year-end on the assumption that the US Fed does finally hike rates, and US 10-year yields push well back into the upper-half of their 2-2.50% range.

However, in this scenario, we see NZGBs outperforming USTs i.e. NZGB-UST27s spreads should narrow. We continue to broadly see a 90-130bps range for this spread.

Overnight, US 10-year yields pushed off their lows after a stronger than expected US ADP employment report. The market looks to this data for a steer on Friday’s all-important payrolls report, regardless of misgivings about the correlation between the two series. From 2.15%, US 10-year yields now trade at 2.19%. We believe yields remain vulnerable to another sharp leg higher on a solid payrolls report on Friday.

In the early hours of this morning, Fed Chair Yellen, has also attempted to keep a 17 December rate hike front of mind. She has made it clear the Fed is keen get started on policy normalisation, even if the pace will be very slow. She worries that to delay would lead to abrupt tightening that could inadvertently push the economy into recession. The market is back to pricing almost a 75% chance of a hike this month.

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