Curves flatten to near bottom end of expected 2016 range. Markets see fewer Fed hikes

By Kymberly Martin

NZ swap and bond yields closed down 4-6 bps yesterday.

Overnight, as some relative calm returned to markets, US 10-year yields traded between 2.11% and 2.18%.

With little on the domestic agenda yesterday the market took its cue from Friday night’s decline in US yields.

Downward pressure was most significant at the long-end of the NZ curve, where 10-year swap closed down 6 bps, at 3.55%. The 2-10s curve flattened to 80 bps. On a further push below 80 bps, we would look for opportunities to position for steepening, within the 75-125 bps range we foresee this year.

Overnight, risk markets began to stabilise despite further large falls in Chinese equity indices yesterday. US 10-year yields pushed off Friday’s lows. This occurred even in the backdrop of a further 6% plunge in the WTI price in the early hours of this morning.

US 10-year yields trade at 2.14% this morning. Fed fund futures continue to price less than two further hikes this year, compared to the Fed’s ‘dot points’ that imply four.

Look out for a couple of Fed speakers today (Kaplan and Vice Chair Fischer), to gauge how the institution’s mood is evolving in the light of the strong US payrolls report, and China-centred market volatility.