Little change in yields as markets settle in, unprepared for the unexpected. Better German and worse US indicators ignored. Eyes now on AU CPI release

By Jason Wong

Global rates are little changed, with daily changes for UK, Germany and Japan 10-year rates all less than a full basis point.

The US 10 year rate is 1.76%, unchanged for the day so far, and trading within a 1.74-1.79% range intraday.

A gauge of US Treasury market volatility – the so-called MOVE index – has dropped to its lowest level since December 2014.

This could reflect a number of factors, such as the suppression of volatility induced by global central bank policy (including the quantitative easing policies still underway in Japan, Europe and the UK) and widespread agreement in the economic and policy outlook in the US.

Low volatility could also mean an eventual wake-up call for the market should some shocking data emerge, such as an unexpected lift in inflation.

For now, the US 10-year rate looks stuck in a 1.70-1.80% zone as we await next week’s FOMC meeting, which is widely expected to see the Fed keep rates unchanged and keep alive the prospect of a December hike.

In terms of the key economic releases overnight, Germany’s IFO business expectations index came in stronger than expected, but as this followed a stronger PMI figure released the previous day, market reaction was muted.  In the US, consumer confidence was weaker than expected, but with the index falling from a post GFC high, the market was unperturbed.

Local trading yesterday was all about playing catch-up with the offshore moves on Friday night and during the Monday session when the NZ market was closed.  And with low volatility in global rates, the market didn’t have much to go on.  There was a slight flattening of the swap curve, with the 2-year rate up 1.5 bps to 2.10% and the 10-year rate down 1 bp to 2.725%.

Australian CPI data this afternoon will be close watched, with some possible backwash on the local market if the result surprises.