Rate curves tighten as levels fall. Oil trying to rise, but move is modest. US Fed and ECB officials talk about their options

By Kymberly Martin

Following the lead from US Treasuries, NZ swap and bond yields closed down 3-7 bps yesterday.

Last night, US 10-year yields traded a range between 2.05% and 2.10%.

The NZ swap curve flattened yesterday as the long-end took its cue from offshore moves. NZ 10-year swap closed down 6 bps, at 3.52%, taking the 2-10s curve to 79 bps. This is moving toward the lower end of the 75-125bps range we anticipate this year, consistent with our view that US 10-year yields trade a 2.00-2.75 bps range.

If US yields were to break below this range, then the lower side of our expected range for the NZ curve would also be threatened.

Overnight, US 10-year yields have consolidated between 2.05% and 2.10%. They are currently attempting to push higher as the WTI price has rebounded by around 2.5%.

The Fed’s Bullard was quoted overnight as saying the renewed decline in the oil is "becoming worrisome". He said central banks tend to "look through" oil price changes. But one circumstance where they may become more concerned is when inflation expectations begin to be impacted. He said that neither the markets nor the Fed were thinking in terms of a January hike. His comments were seen by markets as a subtle shift in tone, given he had shown more hawkish leanings in the recent past. The market continues to price less than two further Fed hikes this year.

ECB Minutes released overnight, showed some members had argued in favour of more expansionary policy at the last meeting. They preferred a deeper cut to the deposit rate and a stepping up of monthly bond purchases. Others favoured less. Still there was a broad agreement that a “reassessment could be made in the future about the potential to increase monthly QE”.

Overnight, the Bank of England voted 8-1 to keep its benchmark rate at 0.5%. Officials said that financial market volatility had “underlined the downside risks to global growth, primarily emanating from emerging markets”. The Bank also was less sanguine on the UK economy saying it was “slightly weaker” than expected. The market is not pricing a first BoE rate hike until well into 2017.

AU short-end rates experienced a bit of volatility after the release of a stronger than expected AU employment report yesterday afternoon. However, expectations for RBA activity are little changed. The market continues to price a further 25 bps cut by year-end.