Yields rise, bond prices fall, as investors grow nervous about global monetary policy, with the US Fed unlikely to move until December and the ECB reluctant to do more easing

By Jason Wong

The global bond market sell-off that began in early July, but reinvigorated late last week, has continued overnight.

Germany and UK 10-year rates are up in the order of 3-4 bps, while the US 10-year rate is up 7 bps to 1.73%, the highest level since the Brexit vote.

The outlook for global monetary policy lies behind the sell-off. 

The ECB’s lack of action last week proved to be a wake-up call to investors. For Germany’s 10-year rate, a yield of 0.07% is much better than the minus 0.12% it traded at last week, but it still hardly represents a compelling investment opportunity. It’s going to be interesting to see where it ends up. 

The debate rages on in the US about whether the Fed should, shouldn’t, will or won’t raise interest rates next week.  With Fed-speak in black-out mode ahead of next Thursday’s decision, the combination of stronger than expected retail sales and CPI data released over the next few days will likely be required to get the Fed over the line. At this juncture, December still looks like a much better bet.

NZ is just a by-stander in all of this, with the yield curve influenced more by these global forces than local considerations.  Yesterday, NZ government bond rates were up around 2-3 bps across the curve with the 10-year rate closing at 2.465%.  There was a slight flattening in the swap curve, with the 2-year rate up 2 bps to 2.06% and the 10-year rate flat at 2.57%.  However, the offshore moves overnight should see a steeper curve today.

The data calendar is fairly light over the next 24 hours.  NZ current account data should show a further narrowing of the deficit, but the market is unlikely to react.