Jump in Aussie 10yr yields spills over to New Zealand. Yield curve steepens. Shorter end held back by weak local labour market data. But markets don't see more OCR easing as a result

By Jason Wong

It’s been a day of little change in global bond rates, with 10-year rates across the US, Europe and Japan all within just 1 bp of previous closes.

The US 10-year rate is down 1 bp to 1.54%. There’s been little change in US monetary policy expectations over the past few trading sessions. OIS pricing has just 10 bps of tightening priced into the curve by the end of the year.

Fed speakers continue to join the chorus proclaiming some tightening in policy will soon be appropriate. Chicago Fed’s Evans’ (alternate voter) view overnight was that “perhaps” one rate increase “could” be appropriate this year. Traders were hardly rushing to sell Fed Feds futures on that comment.

Australian bonds were an outlier yesterday, with the 10-year rate up a considerable 11 bps to 1.93%, unwinding the strong rally over the previous week. This move likely had some spillover impact on NZ rates, with NZ’s 10-year bond yield up 4 bps to 2.19%.

There was a steepening of the yield curve, with the 2-year swap rate down by 1 bp to 2.025%, supported by NZ’s weaker than expected labour market data, while the 10-year swap rate rose by 4 bps to 2.47%.

Despite the soft wage and activity data from the LCI and QES, the market was unwilling to price in additional monetary policy easing in NZ. The rates curve already shows a cash rate low around 1.65% around May/June next year, suggesting almost two and a half 25 bps rate cuts have already been priced in. Trading conditions today are expected to be light with little change in rates, following the lack of offshore moves and little expected newsflow.