US Treasuries curve steepens, led by the long end; US 10-year rate up 8bps to a fresh three-month high. NZ rates higher as investors make way for new bond supply; demand solid for syndicated tap of 2033s, despite deteriorating fiscal accounts

The key market move overnight has been the US Treasuries curve steepening, with the 10-year rate up to a fresh three-month high of 3.94%. The move was ahead of FOMC meeting minutes that didn’t add much new. Currencies show small moves, but notably the AUD has been dragged down as the yuan has weakened again.

The mood yesterday was soured after China’s Caixin services PMI fell by a larger than expected 3.2pts to 53.9, a larger fall than the official services PMI released at the end of last week. The data played to the theme of weaker China economic momentum following the easy gains as the economy recovered from the end of the zero-COVID policy.

The data triggered a weaker yuan, after the PBoC published another strong CNY reference rate that temporarily supported the currency. USD/CNH has trended higher since and trades back above 7.26. The weaker yuan has been a drag on AUD performance, pushing it down to 0.6660. The NZD has been less affected, and it has been oscillating mainly just below 0.62, seeing NZD/AUD push higher to 0.9285.

The weaker China PMI has also been reported as being a drag on European equities, with the Euro Stoxx 600 index down 0.7%. After the US holiday, key US equity indices are all modestly lower, with the S&P500 currently down 0.3%.

The US Treasuries curve has steepened, with the 2-year rate little changed at 4.94% and the 10-year rate up 8bps to 3.94%, a fresh three-month high. This move came prior to the release of the FOMC minutes of the June meeting. There was little reaction to the minutes with no surprises. Recall it was the meeting in which the Fed paused the tightening cycle after the long sequence of rate hikes.  The minutes said that “almost all participants judged it appropriate or acceptable to maintain the target range for the federal funds rates at 4% to 5.25%”, while “some” favoured a 25bps hike. Fed staff economists continued to forecast a “mild recession” starting later this year, at odds with Chair Powell’s expectation for slow growth.

The market remains on board with the Fed’s view where “almost all” officials expect more rate increases in 2023. The July meeting is priced at +21bps, with another 12bps of hikes priced over the subsequent two meetings.

European rates show much smaller moves than the US, with Germany’s 10-year rate up just 2bps. Euro area data released were monetary policy-friendly. The final reading of the Euro area composite PMI saw a downward revision of 0.4pts to 49.9. In the realms of second-tier data, Euro area PPI inflation fell 1.9% m/m in May, taking the annual change to minus 1.5% y/y, the first fall in 2½ years, driven by plunging energy costs. Euro area house prices fell 0.9% q/q in Q1 following the 1.7% fall in Q4, the first back-to-back fall in house prices in almost a decade. And the ECB’s monthly survey of consumer expectations showed year-ahead inflation expectations down two-tenths to 3.9%, the lowest level since March last year. These data suggested the ECB was getting good traction with its tighter monetary policy stance.

UK rates showed larger moves, with 2 and 10-year gilt yields up 7-8bps. JP Morgan research said there was a risk that the BoE will have to push interest rates as high as 7% and trigger a hard landing in the economy to quell inflation. Rate hike expectations built into the curve continue to increase, with over 140bps of additional hikes now priced, taking the policy rate towards the 6.5% mark.

Higher rates are no longer offering any support to GBP, which has been sticky around 1.27. EUR also shows only small moves for the day and is down slightly to 1.0860.

The NZ rates market underperformed yesterday, after the well-anticipated launch by NZDM of a syndicated tap of the 2033 bond. The cheapening was led by the swaps curve, with 5-10 year swaps closing the day up 5-6bps, while the 2-year rate was steady at 5.52%.  NZGBs were up 3bps across the curve. The Treasury expected to issue at least $3b and capped at $5b, with initial price guidance of 4-7bps over the 2032 bond. By the end of the day the order book was over $7.5b and the top end of the price guidance was shaved by a basis point.

Demand for the bonds evidently wasn’t affected by the government’s fiscal accounts continuing to deteriorate at a rapid rate, with a shortfall in corporate tax revenue largely responsible for the core operating deficit running $2.1b higher than Budget projections for the 11 months to May, the deficit on a cash basis running an even higher variance of $4.3b, and net debt higher again at $5.1b.  The deteriorating fiscal accounts will keep the upward pressure on government bond supply over the fiscal year ahead. 

The economic calendar picks up in the day ahead. Tonight sees the release of US ADP employment, initial jobless claims, JOLTS job openings and the ISM services index, with all of them potentially market moving events.