US 10-year treasury yield could be 2% shortly if commodity prices continue downtrend; NZ yields at mercy of offshore markets in face of little domestic data

By Kymberly Martin

NZ swaps closed up 1-3bps across the curve yesterday. Overnight, US 10-year yields traded down from 2.20% to 2.12%.

Domestic drivers of rates remain thin on the ground at present. Yesterday’s December ANZ commodity index continued a broad downtrend, but unsurprisingly was mostly due the fall in dairy prices.

Fortnightly GDT dairy auctions will remain the commodity indicator with the greatest potential to impact on NZ rates. The next event is not until mid-next week.

In the meantime, NZ 2-year swap now sits at 2.75%. The 2-10s curve has steepened a fraction to 83bps.

Overnight, equities are attempting to hold on to gains, despite further heavy falls in the Energy sector, linked to further declines in the global oil price. But trading in US Treasuries yields closely followed the latter. Both reached intra-night peaks in the early hours of this morning, and have subsequently fallen sharply.

From close to 2.20%, US 10-year yields are now trading below 2.12%. This is an important level of support for yields. A break through here would open the way for a return to 2.00%. This marks the lower end of our expected trading range for US 10-year Treasuries this year, of 2.0-2.75%.

Overnight, comments by Fed Vice Chair, Fischer, captured some attention. He said that the Fed was still conducting expansionary policy, but that the US unemployment rate is now very close to the natural rate. i.e. not too much slack.

He negated the idea that the Fed could choose to employ negative rates in a future crisis. He said it would be very difficult to implement at short notice, and that monetary policy many be more constrained by the zero lower bound today than in the past.

This evening there are another couple of Fed speakers to look out for. Ahead of that, China trade balance data is due this afternoon, with potential to impact on general market risk appetite.