Speculators positioned for a weak US jobs report, and risk is to a positive rather than negative surprise. ECB can't find inflation

By Kymberly Martin

NZ swap and bond yields closed up 2-3 bps across the curve yesterday.

Overnight, US 10-year yields flirted with the top of their range, currently trading at 1.73%.

In the absence of key domestic events yesterday, NZ yields pushed a little higher, following the lead of their US counterparts. The yield on generic NZ 10-year bonds (NZGB 2027s) now sits at 2.49%. This remains well within their broad 2.20-2.60% range of the past six weeks or so. Meanwhile spreads to US equivalents trade near 78 bps.

Overnight the ECB released its account of its last monetary policy meeting. The Bank stated that it was “crucial” to preserve monetary support. It did not yet see underlying inflation on a clear upward trend. In addition, it believed it was too early to judge if the risks presented by the ‘Brexit’ vote were overstated. Whilst the minutes appeared to imply support for further easing measures the ECB did see “increasing scarcity of some bonds”. This will be a consideration for its QE programme, though there was no direct mention of tapering in the minutes.

German bond yields briefly dipped on the comments, but later pushed higher. 10-year yields traded up from intra-night lows of -0.05% to briefly poke their nose about the zero line. They now trade at -0.02%. US 10-year yields traded a similar pattern, also bolstered early this morning by a further rise in the WTI oil price. From intra-night lows of 1.69%, they briefly traded above 1.74%, now at 1.73%.

There is a decent handful of data due tonight and no less than four US Fed members are scheduled to speak. However, as always, it is the US labour market report that will capture most attention. Consensus expectations are for a solid payrolls number (172k), and for average hourly earnings to tick up to 2.6%y/y.

But the rise in US yields in recent days appears to have well anticipated a good report. If history is a guide, yields frequently run-up ahead of the US release, only to slide afterward. However, this time, the risk to that pattern is data showing the speculative community is already long US 10-year Treasuries. i.e. they  are positioned in anticipation of lower yields. Therefore the market may be more vulnerable to any positive rather than negative surprises. Our year-end target for US 10-year yields remains at 1.75%, while we recognise potential for it to trade a range around that in the interim.

Kymberly Martin is on the BNZ Research team. All its research is available here.