Investors positioned for higher yields. China PPI surprises with very high price jumps. Expect further steepening pressure on the NZ curve today

By Kymberly Martin

NZ yields opened higher on Friday, following the previous night’s rise in US yields.

There was a further stark steepening of the NZ curve.

On Friday night US 10-year yields continued their march higher, back toward early-Dec highs, eventually closing at 2.47%.

With limited domestic data updates on Friday the NZ market took its cue from offshore moves. In a now familiar pattern, the short-end of the NZ curve remained better anchored while long-end yields surged higher from the open. NZ 10-year swap closed up 8 bps, at 3.40%. This takes them back toward the top of their range of the past month, following their abrupt rise in early-November.

A good proportion of the rise in US yields continues to be driven by rising inflation expectations, influenced by rising commodity prices, a tighter US labour market and expectations of increased US fiscal stimulus. Inflation expectations, from US 10-year inflation linked bonds, have moved up to 2.0%, from 1.2% at the start of the year.

Friday’s release of China’s November PPI (the prices companies receive for their goods in domestic or foreign markets) played into the global inflation theme. The data came in well above expectation, at 3.3%y/y. This is its highest growth rate since late-2011, and well above the 20-year average of 0.6%y/y.

In addition, the global oil price may gain a further boost at the start of this week after non-OPEC countries agreed to join oil production cuts over the weekend. In addition, the Saudi oil minister promised “to cut substantially to be below the level that we committed to” on 30 November.

However, it’s also worth considering speculative positions in US 10-year Treasuries. Last week’s data showed these are now at their lowest position since January-2015, not far from historic lows. i.e. this portion of the market is now heavily ‘short’ longer-dated Treasuries. On this basis, Treasuries should be less liable to sharp sell-offs, as speculators are already positioned in anticipation of higher yields.

US-German 10-year yield spreads are also worth keeping an eye on. These closed for the week at 2.10%, at range highs. This spread should constrain the extent to which US yields can rise independently.

That said, the developments on Friday night and over the weekend suggest further steepening pressure on the NZ curve today. There is a smattering of domestic data to look out for today. But most of the action will come later in the week, with the meetings of the US FOMC and Bank of England and the release of the AU employment report.

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