The global bond market sell-off, led by the long end of the curve, has extended seeing the US Treasuries curve steeper again and the 10-year rate trading to a fresh high for the year just under 4.2%. The yen has outperformed overnight on a day with only modest currency movements, and US equities are flat. The NZD has traded sideways over the past 24 hours and currently sits at 0.6075.
Ahead of the key US employment report tonight, the US Treasuries curve has continued to steepen, extending that run to eight trading days, with the 2-year rate showing a small rise and the 10-year rate up to a fresh high of just under 4.20% at its peak overnight and currently 4.19%, up 11bps on the day. This takes the 2s10s inversion to “only” minus 71bps from the minus 105bps level at the start of last week. Following the clear break of the 2023 highs, the next levels for the 10-year rate from a technical basis will be the 4.335% intra-day high in October last year or the 4.24% daily closing high back then.
US economic releases looked to be only a secondary force on the market, with the key indicators coming in broadly line with market expectations. The key ISM services index fell 1.2pts to 52.7, with falls in the employment index (to 50.7) and new orders (to 55.0), as well. The prices paid index rose 2.7pts to 56.8, but that should be seen in the context of the big trend decline from over the 80 mark just over a year ago. Initial jobless claims rose 6k last week to 227k, but they remain close to their lows for the year. Challenger job layoff announcements fell sharply in July to their lowest level in nearly a year, and thereby breaking the run of significant job layoffs that began late last year. Productivity growth rose by a much stronger than expected annualised 3.7% in Q2, which helps offset strong wages inflation, but the data can be prone to significant revisions.
There are a number of reasons one could point to for the 24bps lift in the US 10-year rate this week, and closer to 30bps for the 30-year rate, including ongoing signs of the US economy’s resilience, fiscal concerns and the ramp-up in bond supply, and spillover effects from the BoJ’s recent grip on its yield curve control policy.
On that note, Japan’s 10-year yield continued to push higher, reaching its highest level in nearly a decade of 0.655%, seeing the BoJ step in with another unscheduled intervention, buying bonds to contain the sell-off. The bond buying did the trick and saw the 10-year rate finish the day just under 0.65%. The market will continue to test the tolerance of the BoJ to accept yields that could go as high as 1% under the new yield-curve-control policy stance.
In other news, the BoE raised its policy rate by a down-sized 25bps to 5.25%, as widely anticipated, with another split vote – six MPC members voting 25bps, two voting 50bps and one voting no change. The Bank sees current policy as restrictive but continued to run the line that on evidence of more persistent inflationary pressure, then further tightening would be required. The Statement contained an additional line at the end viz “The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term”, presumably to hose down expectations that after the peak in rates is reached any easing will soon follow. On its projections, CPI inflation is still expected to fall quickly but doesn’t return to 2% until Q2’2025, later than previously projected and the MPC continues to judge that inflation risks are skewed to the upside.
Market reaction to the BoE announcement was modest, seeing a slight paring of rate hike expectations, but with two more full rate hikes still fully priced, including 22bps priced for the next meeting. GBP strengthened post BoE, but this simply reversed weakness heading into the meeting and the currency is flat for the day alongside the Euro.
Against a backdrop of generally small currency moves, the yen has been the strongest performer, with weakness after the BoJ’s bond buying intervention that saw USD/JPY approach 144 proving to be temporary. USD/JPY fell towards 142 and has pushed back up to 142.70 as we go to print.
The NZD has tracked sideways in a well-contained range, flat for the day at 0.6075. The AUD has done slightly better, recovering to 0.6550, with NZD/AUD down to its lows for the day around 0.9275. NZD/JPY is the weakest on the crosses, down to 86.7.
Oil prices are up 2-3% after Saudi Arabia extended its 1 million barrels per day production cut for another month, into September, and this may “be extended, or extended and deepened”. Brent crude is trading back above the USD85 mark.
The NZ swap market saw pressure to steepen yesterday, as seen in global markets, with the 2-year rate down 1bp at 5.46% and the 10-year rate up 4bps to 4.72%. NZGBs didn’t follow the pattern with only small net changes across the curve. The government bond tender showed relatively stronger demand for the ultra-long bonds, with bid-cover ratios lower for the shorter dated bonds on offer. The 10-year NZGB closed the day up just 1bp to 4.75%, with the small lift this week a clear outperformance against the backdrop of the strong rise in US Treasury yields. Since the NZ close, the Australian 10-year bond future is up 8bps in yield terms, which will impart an upside bias to NZ rates on the open.
In the day ahead the RBA releases its Statement on Monetary Policy which will contain the full suite of new forecasts, but is unlikely to perturb the market, following the policy update earlier in the week. The key economic release will be the US employment report tonight, where the consensus sees solid employment growth of 200k, a steady unemployment rate at 3.6% and mildly softer wages inflation.
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