Yellen signals their December rate hike is still likely, says she will serve full term. Markets resume the bond rout following yesterday's reversal. NZGBs in strong demand

By Kymberly Martin

In a significant reversal of recent moves, NZ long-end yields closed down 8-10 bps yesterday.

Short-end yields were steadier.

Overnight, US 10-year yields pushed up from 2.20% to 2.26%.

The NZGB market took advantage of the relative stabilisation in offshore markets to enjoy a decent rally yesterday. The NZDMO’s tender of NZD150m of NZGB2025s attracted a strong 4.9x bid-to-cover ratio. The bonds were sold at yields below their pre-tender marks, suggesting keen demand.

Following the tender, NZGB yields across the curve extended their morning’s decline. The yield on generic ’10-year’ bonds closed 10 bps lower, at 2.98%. NZ 10-year swaps also declined 9 bps, to 3.17%.

Moves at the short-end of the curve were more contained. NZ 1-year swap was little changed and 2-year swap closed down 4 bps, at 2.22%. As previously discussed, we anticipate 2-year swap will trade a 2.10-2.35% range in coming months, around a ‘fair value’ that currently sits close to 2.20%. This is based on our view that the OCR will remain steady at 1.75% throughout 2017, before the RBNZ begins a gradual hiking cycle from late H1 2018.

Yesterday’s AU labour market report was softer than expected. Our NAB colleagues now see trend employment growth tracking at -1k a month. They also believe that the headline unemployment rate of 5.6%, likely understates the degree of spare capacity in the labour market. AU short-end yields dipped a little following the release. The market now prices around a 30% chance of an RBA cut within the year ahead. NAB continues to expect the RBA to cut rates by 50 bps in 2017. 

US yields pushed higher in the early hours of this morning as Fed Chair Yellen spoke to Congress. She said it would be appropriate to hike “relatively soon” (with the usual caveats). She also reiterated future rate increases would be gradual. It was fairly standard Yellen. She also confirmed it was her intention to serve out her full four year term, until Jan-2018, deflating recent speculation she might resign under the new US administration. The market now prices a 96% chance of a Fed hike on 14 December. US 10-year yields have pushed up from 2.20-2.26%.

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