Markets fret about US debt ceiling, North Korea, US tax reform. And adopt a risk off view. Low long end yields continued recent NZ curve flattening

By Doug Steel

An uneventful US Treasury bill auction overnight won’t stop the market fretting about the US debt ceiling.

This, along with difficult NAFTA negotiations, geopolitical tensions, and Harvey’s impact have combined to see the market slightly reduce its expectations of Fed tightening.

US 10 year Treasury yields fell as much as 5 bps shortly after the local close yesterday as risk sentiment hit its nadir. Yields dropped down towards 2.08%, their lowest level since November last year. Some recovery then ensued as risk sentiment improved, supported by stronger consumer confidence, with yields now back to around 2.13%, although still down about 3 bps from this time yesterday.

NZ swap and bond yields fell yesterday, as the missile-induced global risk off tone weighed. This was most pronounced in the longer end with NZ 10 year swap yields down more than 4bps to just under 3.09%.

Downward pressure looks set to remain today given offshore moves.

Low long end yields continued recent curve flattening as NZ 2 year swap yields fell 2 bps to 2.165%. The latter remaining within the 2.15% to 2.20% range over recent weeks, anchored by expectations that the RBNZ will be on hold for a long time. We don’t expect this afternoon’s speech by RBNZ Governor, Graeme Wheeler, to give any forward policy guidance given its title ‘Reflections on the stewardship of the Reserve Bank’. It will be more of a look back than a look forward.

Looking ahead, US ADP employment and German inflation will garner some interest as will President Trump’s expected tax announcement, although the market is likely to take it with a grain of salt until it sees some action.

Focus for now remains on North Korean tensions and the impact of Hurricane Harvey.

Doug Steel is a senior economist at BNZ Markets. All its research is available here.