Fed indicates only two more rate hikes this year. The jump in the NZD raises chance of more OCR cuts. NZ bond yields follow US higher

By Jason Wong

Treasury yields fell, following the more dovish Fed stance. 

The Fed has put less weight on the rising inflation pressures and put more weight on the softer global environment. 

With only 2 rate hikes now projected for 2016, down from 4, US Treasury rates fell across the curve.  As I write, the US 2-year rate is down 7 bps to 0.90% while the 10-year rate is down 5 bps to 1.92%.

Pre-FOMC the market had priced in a Fed Funds rates of 0.71% by the end of this year, implying about 33 bps of rate hikes.  At the time of writing, that had dropped to 0.63%, so 8bps of tightening this year has been priced out of the curve.

The rebound in the NZD will add to the chance of further RBNZ easing over coming months.

The weaker dairy auction yesterday morning set the scene for slightly lower NZ rates, but this was eventually met with some resistance.  The market was reluctant to take rates too far down, ahead of the FOMC meeting, and payside flows were evident, as offshore traders took profits on received positions. 

This saw higher rates by the end of the day.  The 2-year swap rate rose by 2 bps to 2.29%, while the 10-year rate was up 4bps to 3.12%.  The latter is up 14 bps from Thursday’s close last week, with higher US rates filtering through into the local market.

NZ bond rates have also followed higher US rates.  NZ’s 10-year rate closed up 4 bps at 3.11%.  This bond was sub 3% late last week.  Today the DMO will offer $100m of Apr-2020 bonds.  Recent ownership data have showed good appetite for NZ bonds by foreign investors.  Local yields should have a downward bias after the dovish FOMC, but Yellen’s press conference will determine if this move is sustained.

Coming Up

NZ GDP is expected to show a 0.7% q/q increase for Q4, with the balance of risk to the upside, with the expenditure-based measure expected to be even stronger.  The risk is also for a stronger Australian labour market report for February, following weakness is the previous two months.  The Bank of England’s policy decision of no-change should be a non-event for the market.