Bond traders take to the sidelines, but markets now not expecting a Brexit shock. Few official rate changes expected. Eyes on NZ migration data

By Jason Wong

There hasn’t been much movement in US Treasury rates, but the recent upward bias to rates has continued, with the 10-year rate up 1 bp to 1.70%, its highest level in a couple of weeks.

A poor 5-year US bond auction didn’t help matters, with the lack of participation possibly reflecting traders sitting on their hands ahead of the UK referendum.

Fed Chair Yellen’s testimony showing slightly more caution on the economy had little impact on the rates market.

The OIS market prices little chance of the Fed tightening in July, a roughly one in three chance of a move by September and a slightly better than even chance of a hike by December.  Barring a shock Brexit vote, the Treasury market is likely to remain quiet until fresh employment data are released early next month.

There was nothing in the RBA minutes to suggest a near-term easing in monetary policy and Australia bond futures have traded heavy since their release.  The minutes mentioned a number of times that various economic variables were “stronger than expected”. Our NAB colleagues maintain their forecast of unchanged interest rates this year. A very low Q2 CPI could see another adjustment by the RBA, however, the very aggressive 1.00-1.25% cash rate forecasts by some seem unlikely, based on NAB’s forecasts, and would require a more significant weakening of the Australian economy.

In local trading yesterday the offshore trends provided a lift to NZ interest rates, with swap rates 2-years out up in the order of 2-3 bps.  NZ’s 10-year government bond yield is back above the 2.5% mark, up 4 bps on the day to 2.52%.

It’s a fairly quiet day ahead on the economic calendar.  We’ll be watching to see if data confirm that NZ net migration is coming off the boil.

Tonight, Yellen will repeat her testimony and answer some more questions, this time from the House Financial Services Panel.