Speculative positions anticipate deeper negative rates from the ECB and lower yields in the US. NZ rates curve steepened with rises at long end

By Jason Wong

US Treasury yields are slightly lower and have traded in a tight range.

The 10-year rate is down 2 bps to 1.82%.

We see US Treasuries as more vulnerable to positive than negative data surprises.

Published CFTC data show that speculative positions in US 10-year Treasuries are now net long. i.e. speculators are anticipating lower yields. Speculative long positions are at their highest level since May 2013, just before a sharp rise in yields occurred.

Other global bond rates are lower overnight after bouncing higher from recent lows earlier this week.  Germany’s 2-year Bund fell to a record low of minus 0.58%, on anticipation of further ECB easing next week.  Next week the ECB will have to cut the deposit rate to -0.4% and add further quantitative easing measures just to meet market expectations.

The recent steeping in NZ’s rates curve continued yesterday.

The 2-year swap rate was flat at 2.43%, underpinned by expectations of further RBNZ easing this year, while the 10-year rate was up 3 bps to 3.14%, driven by higher offshore rates.

The 2s10s spread is 72 bps, up from 65 bps at the end of last week. Over the course of the year we think there is scope for further steepening, as higher US bond rates spill-over into the local curve.

Trading is likely to be quiet ahead of the RBNZ meeting next week. The probability of a 25 bps rate cut has slipped over recent days and now stands at 23%.  This is down from 33% earlier in the week.  Cut or no cut, the RBNZ is widely anticipated to recognise the weaker inflation outlook and strengthen its easing bias.

Coming Up

The key release over the next day is US non-farm payrolls.  Another robust change in payrolls is expected, just under the 200k mark, leaving the unemployment rate at 4.9%.   Perhaps more important will be the wage figure, with the market interested if the recent uptick in wage inflation is sustained, or not.  The Fed is unlikely to hike again at its March meeting, but signs of a tighter labour market with higher wage inflation would reinforce FOMC members view that US monetary policy needs to tighten further this year.