The bond market sell-off has accelerated over the past 24 hours, seeing big increases in rates across all countries. The NZ 10-year swap rate hit 2% yesterday, the first time since 2019, while the US 10-year rate got to within a whisker of 1.5% overnight. Equities have come under pressure from the rise in bond yields, with tech stocks falling hard, while currency moves have been more modest. The NZD made a new post-2018 high yesterday, above 0.7450, in the wake of the Finance Minister officially announcing a change to the RBNZ’s monetary policy Remit.
There haven’t been any major new developments to speak of overnight (a lower than expected US jobless claims number being one of the few highlights), but the relentless bond sell-off has picked up pace. The US 10-year Treasury yield is up another 11bps overnight, to 1.48%, its highest level since last March and some 42bps higher this month alone. Ominously, the US 10-year rate is still not that far above its pre-2020 low (set in 2016, of 1.33%). Meanwhile, the 5-year point on the curve (+15bps) has led the move higher in US rates, with the market bringing forward its pricing for when the Fed will start raising its cash rate, to early 2023. Elsewhere, bond yields were up by 7-11bps in Europe and the yield on the Australian 10-year bond future is about 20bps higher than this time yesterday. NZ rates also saw huge moves yesterday (see more below), which will likely extend further this morning.
The move higher in rates mainly reflects investors’ building expectations for a turbo-charged global economic recovery on the back of major economies reopening and Biden’s proposed massive fiscal stimulus. Central banks remain firmly in dovish mode for now, with ECB chief economist Lane saying overnight the central bank was prepared to adjust its bond buying programme to prevent an unwanted tightening in financial conditions. But the dovish rhetoric has had little lasting impact, with markets continuing to bring forward the timing of expected policy rate hikes.
Equity markets are starting to feel the pinch from the move higher in rates. The S&P500 is down 1.7% as we write this while tech stocks have underperformed, with the NASDAQ 2.7% lower. The prevailing narrative last year, that ‘there is no alternative’ to equities, given the ultra-low bond yields at the time, is now being tested. But, to put things in context, the S&P500 is still only about 2% from its all-time high set earlier in the month.
Currency moves have been modest in comparison to the those in bonds and equity markets. The USD’s performance has been mixed – up against six of the G10 currencies and down against the other four. The EUR has punched up through 1.22, a rise of 0.5% on the session. The AUD reached 0.80 overnight, the first time since 2018, although it has since fallen back as equity markets slumped. The AUD is now lower than where it was this time yesterday, at around 0.7930. The NZD reached an intraday high above 0.7450 yesterday, shortly after the Finance Minister announced the RBNZ’s Remit would be changed, but it too has fallen back the past few hours and now sits around 0.7415.
Domestically, there was a huge move in NZ wholesale rates yesterday, right across the yield curve. The 2-year swap rate jumped 10bps, following on from its more modest 3bp rise after the MPS yesterday. The 5-year and 10-year swap rates rose 16bps and 18bps respectively, with the latter hitting 2% for the first time since 2019. Note that Governor Orr speaks at 12:30 today, where he will have the opportunity to elaborate on the RBNZ’s policy rate outlook.
The big move in NZ rates reflects several factors. First, the market continues to digest the MPS from Wednesday, at which the RBNZ didn’t explicitly push back against market pricing for an OCR hike in 2022. Second, Finance Minister Robertson officially announced a change to the RBNZ’s monetary policy Remit (see more below), which will require it to assess the impact of its policy on house prices as a secondary objective. The market seemed to interpret the Remit change as having hawkish implications for the RBNZ policy outlook. Third, global rates (particularly Australian rates) continue to head sharply higher. The RBA announced an upsized $3b buyback of government bonds under its Yield Curve Control policy yesterday but this failed to stem the rise in longer-term rates, with the Aussie 10-year bond yield up some 12bps yesterday and higher again overnight. Finally, investors unwinding positions exacerbated the moves.
By the close of trading, market pricing for the February 2022 RBNZ meeting was sitting around 0.4%, implying a roughly 60% chance of the RBNZ hiking this time next year. But it’s not just NZ where the market is bringing forward rate hike expectations. The market now prices the first 25bp rate hike in Australia around the end of 2022, despite the RBA recently saying it didn’t expect to raise rates until 2024 “at the earliest.”
Yesterday, Finance Minister Robertson announced that the RBNZ monetary policy Remit would be changed, as flagged late last year. There will be no change to the RBNZ’s primary monetary policy objectives, related to inflation and maximum sustainable employment But from March, the Monetary Policy Committee will need to assess the impact of its decisions on the government’s objective of having sustainable house prices, in addition to its other pre-existing considerations (such as avoiding unnecessary instability in output, interest rates and the exchange rate). Separately, the Finance Minister said the RBNZ will need to have regard to house price sustainability in its financial stability decisions as well. Our initial reaction is that this Remit change is unlikely to fundamentally alter the outlook for monetary policy. But the market, which pushed both NZ rates and the NZD higher after the announcement, seems to have interpreted the change as implying the RBNZ will, at the margin, run policy a little tighter than it would have otherwise.
There is US personal income and spending data out tonight. The US personal savings rate, which was already sitting at an extremely high 13.7% in December, is forecast to increase further, boosted by the US government’s recent fiscal package (including a batch of $600 cheques sent to households). The extremely high stock of US household savings is one reason some economists expect a wave of pent-up spending once the economy reopens. The official Chinese PMIs are released over the weekend.