NZGB yields push higher making fresh highs; UST rates down across the yield curve; net speculative UST data shows short positions at historical highs, which should control yields in the short term; German 10yr yields down 7bps to 0.24%

By Jason Wong

Global bond yields have fallen, as the market takes a breather from the recent significant sell-off. Little economic news was released overnight and volumes have lightened up as Christmas approaches. Germany's IFO business climate index rose to 111, its highest level in almost three years but that hasn't prevented a rally in the Bunds market, with Germany's 10 year rate down 7bps to 0.24%.

US Treasury rates are down across the curve, with the 2-year down 3bps to 1.22% and the 10-year rate down 6bps at 2.53%, trading close to the session lows at the time of writing and down 11bps from the peak reached on Thursday night. Net speculative position data shows short positions at a historically high level so this should help keep a lid on yields over the short term, and we expect further consolidation over coming months. US-Germany 10-year spreads are also at a historically high level, and with the ECB bond buying programme keeping a lid on European rates, that should also be a restraining force on US rates heading towards fresh highs.

Yesterday, the local yield curve saw upward pressure on rates and fresh highs. The belly of the curve underperformed, with the 5-year swap rate up 4bps to 2.89%. This compared to a 2bp gain in the 2-year rate to 2.43% and a less than 1bp rise in the 10-year rate to 3.62%.

NZ's strong run of economic data continued, with higher levels of business and consumer confidence and dwelling consents trending higher. Businesses confidence rose even in the face of a sharp increase in interest rate expectations. Inflation expectations are now also on a rising trend. The OIS curve was little changed yesterday, following the ramp up in yields towards the end of last week. A better-than-even chance is priced for a rate hike by August.

Australia's fiscal update yesterday turned out to be uneventful. There was a mild deterioration in the fiscal projections, but not enough to trigger a rating downgrade. The three main rating agencies maintained Australia's top AAA rating, although the comments were hardly glowing. S&P commented that the government's worsening fiscal position added further pressure to the rating and it remained pessimistic about the government's ability to close existing budget deficits.

In the day ahead, the RBA minutes of the December meeting are unlikely to surprise, following its neutral statement earlier this month, while the BoJ is likely to be satisfied with its “yield curve control” policy and keep policy unchanged.

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