By Jason Wong
US Treasuries have moved higher in yield alongside the rebound in risk sentiment, but the break up through the 2% mark has been unconvincing.
The 10-year yield trades at 2.02% up 4bps on the day and up from the 1.94% low reached yesterday morning. Fed fund futures haven’t moved by much, with the Dec-16 contract still showing only a 25 bp lift from current levels.
Local interest rates rose yesterday, despite the lower US Treasury yields in the previous day’s trading. This reflected the fact that yields fell too much, following the weak NZ CPI reading on Wednesday. Furthermore, the string of minor releases yesterday on job ads, consumer confidence and the PMI all had a positive bias.
As noted in yesterday’s report, there had been almost no reaction to the release of the RBNZ’s preferred core inflation measure showing an increase to 1.6% y/y. After sleeping on it, traders decided that the strong rally in rates on Wednesday had gone too far.
In the OIS market, some of the easing pricing in was removed, in the order of 3-4 bps through to September. For the March meeting, the view is now more like 50/50 for a 25bp easing, while the June meeting has 23.5bps of easing priced in.
BNZ economists note that the weaker than expected Q4 CPI outturn puts pressure on the RBNZ to send a clear message at next Thursday’s OCR Review. Either it doubles down on the PTA-flexibility framework it came out swinging with at its December MPS, or it states that it is getting nervous, again, with particular focus now on the low headline CPI inflation. We still lean to the side of the Bank sticking to its guns. However, the risks of the Bank opening the door for further OCR easing have increased.
We saw a 6 bp increase in the 2-year swap rate to 2.65%. Some mortgage and corporate paying was evident during the day and yields rose across the curve, with the 5-year swap rate up 5 bps to 2.99% and 10-year swap up 4 bps to 3.46%.