US Treasury yields jumped higher, following the stronger than expected ISM data and they have continued to grind higher. The 10-year rate is now at 1.82%, up 9 bps for the day.
The probability of the Fed tightening by 25 bps by December is now up to 63%.
Last night, NY Fed President Dudley spoke and the message was on the dovish side. His balance of risk to the US outlook was starting to tilt to the downside and he was somewhat less confident about inflation returning to 2%. There was no acknowledgment of the recent CPI and PCE inflation data which showed larger than expected increases.
There were widespread reports of Japan’s government getting paid to borrow 10-year money for the first time, selling debt at minus 0.02%. This comes as no surprise, following the move into negative territory for secondary market trading of the 10-year bond. In any case the BoJ is buying most of the bonds available anyway and ultimately the bonds will probably get cancelled. If this circus of a money-go-round is meant to support the economy, then I think the authorities need to rethink this “strategy”.
Local interest rates continued to fall yesterday, driven by falling global rates. The 2-year swap rate was down 2 bps to 2.38%, the sixth consecutive daily fall.
The 10-year swap rate was down 3.5 bps to 3.03%, while the 10-year government stock (2027) rate continued to push down to new historical lows, closing down 5 bps at 2.915%.
Another day of falling rates is highly unlikely for today.
The offshore sell-off should filter through into higher NZ rates across the board today.
Over the next few trading sessions, traders will be fine-tuning their positions ahead of next Thursday’s RBNZ Monetary Policy Statement. Yesterday, one local bank economist broke ranks and predicted a 25bp cut in the OCR. The market currently prices in a 33% chance of that happening.
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