Wild price action in the bond market; US 10-year rate trades as high as 5.02% before sharply plunging to 4.83%. US equities weak until sharp fall in rates drives strong recovery off the low

The bond market has been wild, with the US 10-year rate trading an 18bps range overnight on little news, consistent with a fickle market, with a sharp fall to 4.83% after piercing up through the 5% mark for the first time since 2007. The sharp drop in yield supported a turnaround in US equities and pushed the USD lower. The NZD traded at a fresh year-to-date low just over 0.58 before recovering up through 0.5850.

Ahead of NZ’s long weekend, price action on Friday night was consistent with a “risk-off” tone – with lower US equities, capping off a weekly fall of 2.4%; the VIX index closing at a 7-month high just under 22; a modest fall in the US 10-year rate to 4.91% but capping off the largest weekly rise this year of 30bps; and the NZD closing at 0.5830, not much higher than its prior year-to-date low traded on Thursday night.

In the weekend, the Nikkei reported that the BoJ will be pondering the question of whether to tweak the settings of its yield curve control policy at its October 31 meeting, with some officials said to be cautious about the idea as they continue to monitor wage trends. CPI data released Friday showed slightly lower annual inflation of 3.0%, as expected, and a tick down in the CPI ex fresh food and energy to 4.2% y/y, slightly stronger than expected, both the headline and core rates still running well above the 2% target.

The market reaction to the Nikkei report was another push higher in Japan’s 10-year rate, to a fresh 10-year high of 0.86%, while the yen was largely unperturbed. USD/JPY briefly traded above 150 in early Sydney illiquid trading conditions, before settling just below that figure.

In price action overnight, the US 10-year Treasury yield broke up through the 5% mark for the first time since 2007, reaching 5.02% before a sharp reversal ensued, trading down to as low as 4.83% and currently 4.84%, down 8bps from the weekly close. Whether coincidental or not, hedge fund manager Bill Ackman tweeted that he had covered his short bet on US Treasuries and suggested that the economy was slowing faster than recent data suggests. Technicians will be looking at the sharp rejection of the 5% level in a positive light.

The yield curve has flattened with the 2-year rate showing a similar profile, but with smaller moves and currently flat from last week’s close at 5.08%. Global rates have largely followed the profile of the US market, with Germany’s 10-year rate falling 10bps after peaking at 2.97% and the UK rate falling 14bps after peaking at 4.74%.

The US equity market closely followed the move in Treasuries, with S&P futures sharply weaker as the 10-year rate pierced the 5% mark and a sharp recovery as yields collapsed. The S&P500 index fell over 0.8% soon after the open and now shows a modest 0.4% gain for the session.

In currency markets, the USD is broadly weaker from where we left it at Friday’s NZ close, the DXY USD index tracking the US 10-year rate lower. EUR and GBP have shown the largest gains, up to 1.0670 and 1.2250 respectively. The NZD fell to a fresh year-to-date low of 0.5808 overnight, before the reversal in the USD saw the NZD recover up through 0.5850, trading at its highs for the session as we go to print. For the AUD, the lows seen earlier this month held and, after dipping below 0.63, the currency is near 0.6350. NZD/AUD has traded a tight range and sits at 0.9225.

NZD/GBP and NZD/EUR have pushed lower, heading below 0.48 and 0.55 respectively. Against a backdrop of an 18bps swing in the US 10-year rate, JPY has been remarkably well contained, with USD/JPY pushing down to 149.70.

In developments on the Israel-Hamas war, Israel continues to hold off on its planned ground assault on Gaza, against a backdrop of further diplomatic efforts by the G5 to prevent the conflict from spreading. Bloomberg reports insiders suggest growing calls inside Israel for a rethink of the planned ground invasion, due to the uncertainty about the fate of over 200 hostages being held in Gaza, fear of Hezbollah in Lebanon invading Israel from the north, and the risk of heavy Israeli military casualties. Meanwhile, Israel continues with its aerial bombardment of Gaza military targets and with targeted strikes at Hezbollah forces in Lebanon.

The oil market continues to trade as if the conflict won’t spread to involve large oil producers like Iran. Brent crude is trading at USD90 per barrel, down from the USD93 handle of late last week.

On Friday, NZ rates were down about 3-4bps across most of the swaps and NZGB curves, with NZDM’s delayed tender going well, meeting strong demand and yields at premiums to prevailing mids. This capped off a good week for the NZ market against the backdrop of higher global yields, supported by the softer than expected CPI print earlier in the week. NZ-Australian 2 and 10-year rate spreads were down in the order of 20bps for the week, with the RBA’s hawkish meeting minutes an additional support to the NZ market’s outperformance for the week.

Since Friday’s NZ close, the US 10-year rate is 10bps lower, while the Australian 10-year bond future is down just 3bps in yield terms after a volatile session overnight, which will set the tone for the NZ open.

The economic calendar has been light, with only second-tier releases. In the day ahead, UK labour market data on employment and the unemployment rate are released, ahead of a number of PMI indicators across Europe the UK and the US, where the market expects only small changes from the previous month. RBA Governor Bullock is giving a speech tonight on Australian monetary policy.