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Benchmark rates tumble everwhere as sentiment sours for risk assets. Expect local swap rates to fall today following main market moves. CDS spreads widen

Bonds
Benchmark rates tumble everwhere as sentiment sours for risk assets. Expect local swap rates to fall today following main market moves. CDS spreads widen

By Jason Wong

Global bond markets are well supported as sentiment has soured for risk assets.

UK 10-year gilts blasted down through the 1% mark for the first time in history to close down 15 bps at 0.93%.

The likelihood of a credit rating downgrade (enacted after the UK close) didn’t perturb investors, as speculation mounts of a BoE rate cut and further QE to help support the economy during the recession that has likely just begun.  Both German and Japan 10-year rates fell further into negative territory, closing at minus 0.12% and minus 0.21% respectively.

The US Treasury yield curve flattened, with the 10-year rate down 10 bps to 1.46% and the 2-year rate down 3 bps to 0.60%.

Friday’s nadir of 1.40% for the 10-year rate remains the first area of support for yields.  Markets are still toying with the idea that the Fed will be moved to cut rates later this year.  The OIS market prices in 5 bps of cuts by September, suggesting a 20% chance of a 25 bps cut.

The rebound in the US dollar and heightening global economic risks will certainly keep the Fed on the sidelines for some time, but it’s questionable whether it would be moved to actually cut rates over coming months.

NZ rates were little changed yesterday.  There was initial upward pressure in the morning, following on from the recovery in US rates during the Friday night session, but that move wasn’t sustained.  The bias today will be for lower rates, in line with the overnight moves.

Credit spreads are under pressure.  The European senior financials CDS index sold off another 10 bps overnight, following the circa 30 bps widening on Friday.  Closer to home, Australia’s investment grade Itraxx CDS index widened 4 bps yesterday, following the 11 bps widening on Friday.

Daily swap rates

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Jason Wong is on the BNZ Research team. All its research is available here.

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