Higher oil prices drive up global rates; European 10-year rates close at fresh multi-year highs; US 10-year rate reaches 4.85% after disappointment on the size of the expanded buyback program. NZD continues to underperform

Risk sentiment is weaker after oil rose above USD100 per barrel, pushing global rates higher. US Treasury yields received an additional boost after disappointment over the size of the expanded buyback programme. In currency markets, the NZD continues to struggle following the RBNZ’s dovish tone last week.

Focus remains on the Middle East, given the recent intensification of attacks on shipping and energy infrastructure. US Central Command said it had destroyed eight tankers belonging to the IRGC over the past few days in retaliation for Iranian attacks on the US Navy. The IRGC said it targeted two US vessels and ten other vessels that attempted to enter the restricted waters of the Strait of Hormuz with US backing. Bloomberg reported a senior Iranian official saying Iran is ready for a more intense war and will escalate its counterstrikes if the US continues to attack its territory and infrastructure. Late yesterday, Brent crude broke above the USD100 per barrel mark and rose as high as USD101.50 overnight.

Higher oil prices drove global rates higher, with US long-term yields receiving an additional boost after the Treasury Department said it would buy back $6b in its expanded buyback programme at the upcoming operation, up from $2b previously, with later buybacks to be “at least $4b”. The scale of the expanded operation appeared to disappoint the market, as the 10-year rate jumped 5bps to 4.85%. The yield later eased after the rise attracted strong demand at the $39b 10-year auction. The rate is currently 4.83%, up 4bps from the NZ close. European rates are much higher on the day, with 10-year yields up 8-11bps and closing at fresh multi-year highs.

Higher oil prices and rates have weighed on equity markets. The Euro Stoxx 600 index closed down a hefty 1.4%. In late-afternoon trading, the S&P 500 is down 0.4% and the Nasdaq is down 0.6%.

Currency market movements have been modest, although, for a second day, the NZD is the weakest performer of the majors, extending its weak run after the RBNZ’s recent display of nonchalance in attempting to bring inflation quickly back to target. The NZD traded down towards 0.5830 overnight before finding some support. The AUD has been relatively steady, maintaining its 0.72 handle and driving the NZD/AUD cross back below 0.81. NZD/GBP and NZD/EUR have softened to just above 0.43 and 0.5020 respectively, while NZD/JPY has fallen to a fresh low for the year of 89.6.

Yesterday, Treasury Secretary Bessent did not win any friends in the market after boasting about his power, commenting: “I am the house now, so when we intervene with the Japanese yen, I have pretty good insight into…what the Bank of Japan is going to do…and you can bet against me if you want”. USD/JPY has settled in a 153-154 range.

The domestic rates market traded a little heavy yesterday against the backdrop of higher Australian yields, as more economists capitulated and decided that the more hawkish tone from RBA speakers was enough to convince them the RBA would likely hike again later this month, now priced at a more than 70% chance. Swap rates were up 2-3bps across the curve, while NZGBs were marked 3bps higher.

On the calendar, the ECB meets tonight, where a 25bps hike in the deposit rate to 2.5% has been well anticipated for some time and is fully priced. The policy outlook is likely to remain data-dependent and proceed on a meeting-by-meeting basis. The market will be looking through the details to see whether the new forecasts and guidance justify the further two rate hikes currently priced through the middle of next year. US PPI data tonight will be closely watched, although tomorrow night’s CPI release is more important in determining whether the Fed hikes next week.

Jason Wong is the senior Markets Strategist at BNZ Markets.