Wholesale rates keep falling

10-year German Bund futures contract broke through the 0.0% threshold into negative yield territory for the first time ever last night. Expectations lower elsewhere too

Bonds

10-year German Bund futures contract broke through the 0.0% threshold into negative yield territory for the first time ever last night. Expectations lower elsewhere too

1st Mar 16, 8:15am by Jason Wong

By Jason Wong

The NZ 2-year swap rate fell for the fifth consecutive day, down 2 bps to reach a fresh low of 2.40%.

This put downward pressure on the rest of the yield curve, on a day in which yields would normally have risen, based on the previous day’s US move.

The 5-year swap rate fell by 1.5bps to 2.65%, while 10-year swap was flat at 3.07%.

The driver of the interest rate falls was the first ANZ business outlook survey for the year, which showed weaker business confidence and activity indicators, and year-ahead NZ inflation expectations fell by 25 bps to 1.39%.

The market has been gaining confidence over recent weeks that the RBNZ will deliver further rate cuts this year, the question being one of timing.

The June meeting is priced at 2.23%, suggesting a full 25bp cut by then, and a small chance that 50 bps are actually delivered by that date. We think that the market could price in up to 50 bps of rate cuts (even if not delivered) in coming weeks/months compared to the circa 39 bps of cuts current priced in by November. This could see the 2-year swap rate trade down toward its mid-2012 lows below 2.35%.

Overnight, the US 10-year rate has traded in a very tight 3 bps range and currently trades down 1bp at 1.75%.

Despite recent higher wage and CPI inflation data, there’s a real lack of conviction that the Fed will follow through with tighter monetary policy. Weaker than expected pending homes sales and Chicago PMI data supported that view, although these are volatile series on a month to month basis.

Lower global bond rates are keeping a lid on US rates for now. Germany’s 10-year rate fell by 4 bps to 0.11%. Traders noted that the active 10-year Bund futures contract broke through the 0.00% threshold into negative yield territory for the first time ever last night. US long term rates in the high 1s look like great value compared to zero to negative rates elsewhere.

Coming Up

All polled economists expect the RBA to keep its policy rate unchanged at 2.0%. The policy tone is also expected to be similar to February, with the RBA maintaining a mild easing bias. There are lots of international data releases to digest over the next 24 hours. Key highlights are China’s PMIs and US ISM data. NZ’s GDT dairy auction should be fairly neutral overall. NZX dairy futures plunged ahead of the previous auction, but this was not reflected in the GDT auction, so the subsequent sharp rally in the futures shouldn’t be reflected in GDT pricing either.

Daily swap rates

Select chart tabs

Source: NZFMA

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

2 Comments

by bigblue | 1st Mar 16, 8:24am 1456773892

When will the greedy bankers lower their interest rates or are we Kiwis happy to put up with ever widening margins that are permitting the banks to make additional billions of profit. We should by now have two year fixed mortgage rates of 3.5%. Why are we putting up with current bank mortgage rates - is it simply that we think rates in the mid 4's are low enough? Seems like some sort of collusion between the banks to increase their margins.

by Afewknowthetruth | 1st Mar 16, 9:37am 1456778238

The western world is run by banks, corporations and opportunists, for the short-term benefit of banks, corporations and opportunists, and the masses are just 'cannon-fodder'. It has been that way for centuries but the stranglehold the banks and corporations have around the necks of the general populace has tightened in recent times, even as the window of opportunity to avert catastrophe closes.

Even as the world 'progresses' into unprecedented negative interest rate territory and bankruptcies and job losses increase, the banks will retain their stranglehold because the system has been set up to make it impossible to live without them..

It will remain that way as long as ordinary folk keep electing politicians who promote the agendas of banks, corporations and opportunists or until energy depletion and severe climate change bring the system down. Since the vast majority of ordinary people have no idea how the financial system works and think that the government is working for their benefit, nothing will change until there is worldwide catastrophe.

Until that point is reached everything that matters -air quality, water quality, ratio of natural world to urbanised and industrially-farmed world, quality of life, climate stability, sustainability etc.- will continue to be made incrementally worse.