ECB (in)action jolts yields higher. Markets need downward pressure to keep rates low. Eyes now on US non-farm payrolls report

ECB (in)action jolts yields higher. Markets need downward pressure to keep rates low. Eyes now on US non-farm payrolls report

By Kymberly Martin

NZ swaps closed up 1-2 bps, while swap-bond spreads widened a fraction.

Overnight, US and German yields surged higher after the ECB disappointed in the magnitude of easing it announced.

US 10-year yields now trade at 2.31%.

In a relatively quiet day of trading, NZ 2-year swap closed at 2.73%. The market now prices around a 40% chance of a cut at next week’s RBNZ meeting. Our core view remains a cut at this meeting. We believe, trading this view currently offers fairly attractive risk-reward, given market pricing.

Overnight, it was all about the ECB. The Bank announced a further 10 bps cut to its deposit rate (to -0.3%) and a six month extension to its asset purchase program. But this clearly fell well short of what the market had been led to expect by previous ECB rhetoric. German 10-year yields promptly traded up from 0.46% to 0.66%. US 10-year yields traded up from 2.19% to 2.31%.

The move illustrates the influence that offshore yields have had in keeping US long yields low, even as the market has priced a start to the Fed’s hiking cycle. Expectations of continued easing from the ECB and BoJ have helped depress long-end US yields. But equally, yields will abruptly rebound if that downward pressure is removed.

Expect to see a steeper NZ curve today. We continue to see the NZ 2-10s curve steepening within a 75-125 bps range over the medium term. While longer-dated NZGBs will also likely sell-off today, we expect their move will not be as great as that seen in USTs. We therefore remain comfortable being positioned for NZGB-UST27s compression.

It’s now all eyes on tonight’s US payrolls report. Given the sharp step higher in US 10-year yields overnight, they are less vulnerable to a further jolt higher on a solid payrolls report. Still, a strong report could well see yields testing early-Nov highs near 2.37%.


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

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US 10-year yields traded up from 2.19% to 2.31%.

Hmmm.

Up 18 basis points since Tuesday's close - which implies approximately 70% of the on-the-run annual coupon payment has been absorbed by capital losses. Read more

Furthermore, NZGB 27's sport the same semi-annual BEY (3.54%) as swaps. Are the NZ IR swap market makers unable to sustain market making capacity on the bid side? Do we have a financial crisis to report? ANZ recorded over a trillion NZD position in notional IR swaps for the period ending 30 September 2015. Where are the collateral calls landing?