Bounce back

Markets take a less risk-averse tone. They even reduce their bets that the RBNZ will cut again. Credit spreads narrow

Bonds

Markets take a less risk-averse tone. They even reduce their bets that the RBNZ will cut again. Credit spreads narrow

29th Jun 16, 7:53am by Jason Wong

The bounce-back in risk assets has seen only a mild uptick in global bond yields, with government 10-year rates up 3 bps in the UK, less than 1 bp in Germany and 2 bps for US Treasuries.

The US 10-year rate is currently at 1.46%, after trading in a fairly tight 1.43-1.48% range over the past 24 hours.

Q1 GDP was revised up slightly to an annualised 1.1%, although within the mix personal spending was revised lower. The Atlanta Fed GDPNow forecast for Q2 currently sits at 2.6%, which would be the strongest result in a year if that proves correct, a reflection of how sluggish the US economy has been over the past 12 months.

Consumer confidence rose to an 8-month high.

There’s more US data overnight to digest and there’s some interest in the strength of the economy ahead of the shock from UK/Europe that is about to hit.

Credit spreads have narrowed overnight, in line with the improvement in risk sentiment.

With the futures market yesterday afternoon pointing to a recovery in equity markets, Australia’s Itraxx CDS spread narrowed 4 bps, unwinding the previous day’s gain.

In the local rates market, there was a marked flattening of the yield curve, with the 2-year swap rate up 1.5 bps to 2.195%, and the 10-year rate down 4 bps to 2.62%. NZ’s 10-year government bond rate closed at a record low of 2.325% and remarkably is now down about 125 bps for the year to date.

The OIS market has unwound some of the expectations for easier NZ monetary policy. The August meeting prices in a 62% chance of a 25 bps rate cut. On Friday, this was closer to 76%.

Daily swap rates

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Source: NZFMA

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

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3 Comments

by Stephen Hulme | 29th Jun 16, 10:56am 1467154586

NZ’s 10-year government bond rate closed at a record low of 2.325% and remarkably is now down about 125 bps for the year to date.

...low rates are not stimulative at all, rather they are indicative of monetary contraction. Another way of saying that in mainstream terms is if a central bank “needs” to stimulate year after year after year it isn’t actually stimulating anything, it is being slowly strangled by the same monetary noose in sympathy with the real economy. The real economy loses function and activity while the central bank loses (rightfully) credibility. Read more

But one certainty is the rising net present value cost of PPP schemes, such as Transmission Gully, undertaken by the government thinking traditional methods of government debt funding were more expensive than the chosen time value of money racket - you have to laugh as a tax payer, given the other option is not suitable for public consumption.

by Cowpat | 29th Jun 16, 11:16am 1467155773

Inversion out to 3 year bonds both Australia and NZ, 4 and 5 Year should not be far away. Banks will be a little unhappy. Depression coming , economically or psychologically .

by sharetrader | 29th Jun 16, 11:46am 1467157601

How wrong was our leader in 2009, and it looks like another world round of QE may be headed our way

Our present Prime Minister raised the name-calling to a new level as he is of course bereft of any rational argument. Remember John Key calling the Greens’ suggestion after the global financial crisis to print money (quantitative easing) rather than borrowing it from the banks just bailed out by the taxpayer as crazy, lunatic and so on. Even if he as the professional money changer knew better as at the time the ‘lunatic’ US Federal Reserve, the ‘lunatic’ Bank of England, the ‘lunatic’ European Central Bank and the ‘lunatic’ Swiss Central Bank to name just a few were doing exactly that: printing money. The actual lunatic was John Key himself slavishly holding on steadfast to the extremist neoliberal textbook.
As most New Zealanders are financially illiterate the name-calling worked over rational argument and international example and the shellshocked Greens gave up a perfectly sensible policy suggestion.