Markets ignoring Fed speakers. NZGB 10yr yield at record low. Swap rates also push to record lows. RBA reviews today and market expects a cut

By Jason Wong

Despite softer-than-expected readings for US ISM and construction spending data, the 10-year Treasury rate is up 4 bps to 1.50%.

In a speech yesterday afternoon, the Fed’s Dudley, one of the few speakers we take particular note of, said that the market was right to price in a flatter path for short term interest rates but investors were still underestimating how many times the Fed will likely raise rates this year and next year. 

These comments were followed up by Dallas Fed President Robert Kaplan, a hawk, saying that an increase in September is “very much on the table.” 

The market, rightly, didn’t take too much notice of these comments with Fed funds pricing through 2016 down ever so slightly and up slightly for 2017.  More weak data like that recently released, including the poor GDP data on Friday, can only strengthen the market’s resolve that Fed rate hikes remain a distant prospect.

The local rates market was quiet yesterday not helped by the NSW holiday.  NZ’s 10-year government bond rate posted yet another record low, falling 4.5 bps to 2.14%, driven by the US Treasuries move on Friday night.  Expect a small retracement today.

The swap market underperformed the rally, with rates only down by 1-2 bps across the curve. Still, we saw record low rates, with the 2-year swap rate just over the 2% mark at 2.03%.

A notable fall in the RBNZ’s 2-year inflation expectations series released at 3pm today could send the rate sub 2%. 

An RBA cut, just on the local market close, would put downward pressure on the 2-year rate as well, but that would have to wait until the market opens tomorrow morning.  A 25 bps RBA cut would take its cash rate to 1.5%, a record low.  The market prices a 1.32% trough within the year ahead.