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US Treasury yields drift lower as Bank of Japan's new policy focus suppresses yields world-wide. Yields for NZ bonds fall too

Bonds
US Treasury yields drift lower as Bank of Japan's new policy focus suppresses yields world-wide. Yields for NZ bonds fall too

By Jason Wong

US Treasuries have drifted lower overnight, supported by a lack of risk appetite, with weaker equity markets.

The 10-year rate is down 4 bps to 1.58%, having earlier traded down to 1.57%.

The sell-off in the fortnight leading up to the FOMC meeting last week has now been pretty much fully unwound. We continue to see US 10-year yields within a 1.50-1.75% range near-term.

Recall that the pre-FOMC meeting selloff in US Treasuries was linked to rising rates in Germany and Japan.  The Bank of Japan’s decision to target the yield curve could well keep US yields suppressed and reduce global rate volatility. The MOVE index – a measure reflecting market estimates of future Treasury bond yield volatility – has fallen to its lowest level in nearly two years.

Yesterday, the local rates market saw some modest downward pressure on yields across the curve.  Swap rates were down 1-2 bps, with the 2-year closing at 2.01% and the 10-year closing at 2.495%.  We see the 2-year rate trading in a 1.90-2.10% range over coming months as the market keeps a November rate cut well in its sights and toys with the idea of a follow-up move early next year.  The current trough in the OIS curve is around the middle of next year at 1.65%.

NZ bonds continue to find support and the 10-year rate rallied another 2.5 bps yesterday, taking it down to 2.355%.  We expect further outperformance of NZ bonds relative to US Treasuries and swap.

In the day ahead, the market’s attention will be focused on the first US Presidential election debate beginning at 2pm local time. Should be entertaining to watch. 

The data calendar is light and there might be some passing interest in US consumer confidence data released tonight.

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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