US 10-year Treasuries have traded in a 1.72-1.81% range.
Yields moved to the top of the range as US equities opened stronger, but as equities have declined the yield has drifted down towards the bottom, and they currently sit down 2bp at 1.73%.
The market remains unconvinced that the Fed will need to hike rates again this year.
The probability of the Fed hiking by December sits at 45% according to Fed Fund futures and 38% according to the OIS market. Consumer’s 12-month inflation expectations fell to their lowest level in 9-years, with the declining trend consistent with other surveys. The market appears to be putting more weight on inflation expectations data than the recent data showing actual higher wage and CPI inflation.
We continue to monitor the UK market for signs of Brexit concerns on Gilts. The UK 10-year rate rose by 4bps to 1.43% following 2 days of declines, so the bond market is not reacting the same way as GBP.
Trading in the local rates market yesterday was fairly quiet but yields continued to track lower, helped by lower global rates during the Asian session. Offshore hedge funds continue to like receiving NZ fixed short rates, based on their conviction that the RBNZ will be forced into easing policy again. The 2-year swap rate fell by 2bps to 2.48%, a fresh low. The 10-year swap rate fell by 3bps to 3.15%.
This afternoon we’ll be keeping a close eye on Fed vice-chair Fischer to see if he makes anything of the recent uptick in US wage and CPI inflation, or if he makes more of the ongoing decline in inflation expectations.
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