Treasury yields rose a few basis points following Yellen's speech yesterday morning, before shifting higher again after the overnight US data releases. Since the local close the 10-year rate has tacked on 7bps.
The Yellen/data combo has seen Fed pricing of policy tightening edge up for this year. OIS pricing shows the March meeting priced at +11.5 bps, indicating just under a 50/50 chance of the Fed delivering a 2 5 bps hike at that meeting. June is priced at +28 bps while by year-end some 56 bps of tightening is priced in. This remains below the 75 bps of the FOMC median, suggesting further upside potential for interest rates even if the economy tracks in line with Fed expectations.
On the 10-year rate, the 2.60% level remains pivotal and that should prove to be an area of resistance over coming weeks.
Yellen's speech drove an immediate lift in NZ interest rates yesterday, with rises across the curve. Payside pressure in the swaps curve has been evident over recent sessions so higher rates was the path of least resistance. The 2-year swap rate rose by 3 bps to 2.43% while the 10-year rate rose by 7 bps to 3.47%.
Despite the higher market rates, the government's tender of $200m 2025 bonds saw a bid-cover ratio on the light side at 2.2 times. The 2025 yield ended the day 9 bps higher at 3.13%. There's another tender next week which provides an opportunity for asset managers to add some duration to their books with $150m 2037 bonds on offer. They closed yesterday at 3.855%, up 10bps.
Today Yellen gives another speech at 2pm today but we suspect that following the market reaction after yesterday's speech, this afternoon's offering should pass without too much fanfare. China's data dump at 3pm shouldn't surprise either, with consensus GDP growth for Q4 centred on 6.7%. There is little scheduled tonight and Monday is a holiday in Wellington so local trading activity should be uneventful, but the bias will be for higher rates following the overnight move.
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Jason Wong is on the BNZ Research team. All its research is available here.
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