Risk appetite evaporates in rush for safe havens for capital holdings. Yellen says low oil prices and low inflation 'transitory'

By Kymberly Martin

NZ swaps closed down 3-5 bps yesterday, with a flatter curve.

Overnight, US 10-year yields have traded down to 1.58%.

A strong BNZ Manufacturing PMI reading yesterday afternoon, showing the sector remains firmly in expansion, did little to support NZ yields. Rather they continue to take their cue from offshore ructions.

NZ 2-year swap closed down 3 bps, at 2.56%, as the market now prices around 32 bps of RBNZ rate cuts by year-end.

The NZ 2-10s curve has flattened to 59 bps. Until US yields find some sort of floor, there is little point in attempting to fight this near-term flattening trend.

Overnight, the bid for ‘safe haven’ US Treasuries returned as risk appetite again evaporated (Our global risk appetite index has retreated to 16%). Markets appear increasingly anxious about perceptions of faltering global growth, in the backdrop of Central Banks having increasingly less firepower with which to address the issue.

Fed Chair Yellen’s comments overnight reiterated those made the previous night.  She acknowledged that market volatility could threaten the economy. She said the Fed wanted to be able to raise rates very gradually and that energy prices and the strong USD were key transitory factors holding down inflation. Again the possibility of negative interest rates came in for some discussion. The Fed hasn’t taken the option of the table.

As equities have again tumbled and credit spreads widened, US yields have declined across the curve. US 10-year yields now trade at 1.58%, from intra-night lows near 1.53%.

We are now within the range that yields traded during their historic lows of 2012. A 1.40%-1.90% range prevailed for much of that year. This is some way below the range we had anticipated at the start of the year, but clearly with recent market developments, we are revisiting our expectations.