US Treasury yields rose for the seventh consecutive day, with the 10-year rate trading in a 1.89%-1.94% range, reaching its highest level in over a month.
The recent increase in yields has come despite a weak patch of data, with Citi’s economic surprise indicator for the US showing a big fall over the last couple of weeks.
Last night’s softer than expected data on durable goods orders and consumer confidence added to that trend.
Yields have tracked higher as the market prices in greater odds of the Fed delivering another 25bps of tightening this year. December Fed Funds futures are now just 3bps off pricing in a full hike by the end of the year.
The bond market appears more in tune to rising crude oil prices than the softer than expected activity indicators. WTI crude rose by 3% to around $44 per barrel, close to the 5-month high reached in the middle of last week. As oil has recovered strongly, so too has the implied break-even inflation rate on 10-year US TIPS (inflation protected securities). They now trade at an implied inflation rate of 1.68%, well up from their 1.2% low in February. Clearly, rising inflation expectations are the key driver of the rise in nominal treasury yields.
The US Fed has just started its latest two-day monetary policy meeting. At 6 am tomorrow morning the FOMC will release a short policy statement, which will be widely dissected. The prevailing view of FOMC members is that the market under-prices the risk of further Fed tightening this year, so the risk is that the statement is USD-supportive and justifies the recent move up in Treasury yields. The door is likely to be left open for a possible rate hike in June, depending on economic and market conditions.
Higher global rates finally fed through into the local rates market yesterday. Until then, it had been resilient to the global sell-off. Apart from the very short end of the curve, NZ government bond yields were up 5bps across the curve, taking the 10-year rate (2027) up to 2.91%, which is obviously still very low by NZ historical standards. The 2-year swap rate rose by 2 bps to 2.235%, while the 10-year rate rose by 6bps to 3.03%.
This morning Bloomberg heads an article with “RBNZ’s next move is anyone’s guess as Wheeler baffles economists”. That’s a fair reflection of the odds of Thursday’s decision, with the RBNZ mis-firing with its communications. BNZ economists slightly favour a 25 bps easing as the most likely move, while the market under-prices the risk of an easing at just 30%. Personally, I think the Governor has a pretty straightforward decision. With the currency transmission channel out of action, the RBNZ needs to over-stimulate the domestic economy to achieve its inflation target. That means getting interest rates low enough to effectively target non-tradeables inflation of 3%+. It’s been proven that recent OCR settings are not low enough to achieve that. With the stimulus from the Canterbury rebuild fading, dairy incomes in a rut and the global economy middling along, inflation won’t increase of its own accord. Doing nothing would likely cement in a sub-target inflation outcome for the rest of Wheeler’s tenure. The history books won’t be kind if that proves to be the case.
In local trading hours today Australia’s CPI will be a key focus, with a soft outcome expected. Core measures are expected to remain close to the bottom end of the 2-3% target range. Unless the figure is so weak that it brings a near-term RBA easing into play, the figure is only expected to have a passing impact on the AUD.
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Jason Wong is on the BNZ Research team. All its research is available here.
5 Comments
We are importing a lot of deflation, the currency is too high and RBNZ's long term inflation figures are rubbish. Up until now the unofficial policy is 0%+ inflation to try to not overheat house prices. Wheeler fears the lack of inflation (for good reasons).
What does it all mean? There will be new restrictions by RBNZ, the PM is supporting tax changes for foreign owners and defending it, it looks like a big signal. There will be a rate reduction.
I agree, It looks to me like English & Key is pressuring Wheeler to cut rates to which Wheeler is saying only after you put in a new judder bar. I like Judder Bars, you just barrel over them at 50km and don't notice them. Just make sure you have suspension so you dont rip the sump off.
18 months ago banks were predicting an OCR of 4.5% for this year. Or was that 2015?
RB is still anticipating inflation to return to whole numbers sometime soon, 2017, or 2018, or perhaps 2020, or medium-term, or maybe long term err 2025, at some point inflation will return and it must be hunted down and suppressed. So we are very reluctant to decrease the OCR.
It was about 18 months ago or earlier when the OCR rode high. The effects of the lower interest rates are only slowly kicking in. Most people fixed between 1-3 years so there could be another 2-3 years before almost every mortgage is affected by reduced rates. Some of the increased spending will be there but it's clearly not enough to counter the imported deflation, as we can't solve the world's problems.
If only RBNZ understood not trying to kill non-existent inflation in the non-housing parts of the economy.
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