NZ bond and swap yields up across the curve on increased monetary policy tightening expectations; UST rates lower, 2yr and 10yr rates down 2bps and 1bps respectively; UK and German 10yr rates fall by 5bps

By Jason Wong

Global bond markets found some support on Friday, taking a break from the significant sell-off of late.  UK and Germany 10 year rates both fell by 5bps to 1.43% and 0.31% respectively.  In a debt programme update, Germany’s strong fiscal position will allow the government to cut federal bond sales next year to the lowest since 2001.

US Treasury rates were lower across the curve, with the 2-year rate down by 2bps to 1.25% and the 10-year rate down by less than 1bp to 2.59%.  The implied break-even inflation rate on inflation-protected 10-year bonds fell for a third consecutive day, cumulating to a 10bp reduction over that period to 1.89%.  The soft CPI inflation data on Thursday and the strength of the USD dollar have helped pare back inflation expectations a little.  The plunge in housing starts in November was largely ignored as it followed a surge up in October.

Fed speakers were back on the wires.  Jeffrey Lacker (non-voting hawk) warned that the Fed may have to raise rates more than three times next year. In an interview by the WSJ James Bullard, the most dovish FOMC member, backed off his “one and done” rate view and indicated a likely need for another hike next year.  He also favoured a reduction in the Fed’s $4.5 trillion balance sheet sooner, rather than later, suggesting that the Fed should soon look at not re-investing maturing bonds on its balance sheet.

The local market saw upward pressure across the curve on Friday.  There was a noticeable jump in monetary policy tightening expectations for the year ahead as the market re-assesses the RBNZ’s likely reaction function in the face of a likely jump up in headline inflation through 2% over coming quarters and an economy that is still running above trend.  The OIS meeting for August showed a 5bp jump to 1.91%, suggesting a 64% chance of a 25bp rate hike by that time.  Slightly more than one full 25bp rate hike is priced in by end-2017. Bank bill futures for 2018 showed a 4-5bp implied increase in yield and the 2-year swap rate rose by 2bps to a 9-month high of 2.41%.

Longer dated yields also rose to fresh highs, with 10-year swap up 3bps to 3.615% and the 10-year government bond yield up 3bps to 3.41%.

There’s plenty of local data to digest today, with the most interest in the ANZ business outlook survey.  Attention turns to Australia’s fiscal update later in the afternoon, where the risk of a sovereign credit downgrade from the coveted AAA rating could soon follow.

Jason Wong is on the BNZ Research team. All its research is available here.