Global rates reverse course and head higher again; UST yields up 6-8bps. NZ rates fall playing catch-up to global moves at the end of last week

It has been a quiet start to the week with little newsflow to perturb the market. Global rates markets have reversed course after last week’s strong rally, seeing yields much higher across Europe and the US. These moves have seen equity markets trade with a more cautious tone after their big rally last week. Currency markets have been uneventful. The AUD and NZD show modest falls while EUR shows a modest gain.

Bond markets remain choppy. Global rates are higher to start the new week, with European 10-year rates up in the order of 9-11bps. There has been no news to drive the increases, but the reversal of fortunes should be seen in light of last week’s big move, which saw Germany’s 10-year rate fall from a peak of 1.79% to trough of 1.35%. After closing last week at 1.44%, the lift to 1.55% is still 25bps lower than last week’s peak.

US Treasury yields are higher, with 2, 5 and 10-year rates up 6-8bps from last week’s close. The 2-year and 5-year bond auctions were weak, with lower-than-average bid-cover, a low takedown from indirect bidders and a big tail for the 5-year bond, stopping at 3.5bps higher than the when-issued yield, despite the concession built into the market in today’s trading.

There have been only second-tier data releases. Durable goods orders continue to trend higher at a solid pace, up 0.7% m/m in May for both the headline and ex transportation measures, above expectations.  While the data suggest robust business investment, high inflation overstates the apparent strength in the nominal figures. Pending home sales rose 0.7% m/m in May against an expected 4% fall, but this looks like a blip higher for a market that is in a clear downturn, as suggested by many other housing market indicators. The Dallas Fed manufacturing index fell from minus 7.3 to a two-year low of minus 17.7, another regional manufacturing survey that sets up a good chance of the ISM survey to fall by more than expected in data to be released at the end of the week.

Congratulations go to the BoJ which now owns more than 50% of the JGB market in a bid to prevent the 10-year rate from moving above 0.25%. The collateral damage has been effectively destroying one of the largest bond markets in the world, causing frequent market dislocation, and recently sending the yen to its weakest level since 1998 against the USD.

Currency markets show modest movements to start the new week.  The NZD and AUD are on the weak side of the ledger, down 0.3% from last week’s close and keeping NZD/AUD close to 0.91. The NZD trades near 0.63 and the AUD is at 0.6925. EUR has been the strongest of the key majors, up 0.3% to 1.0585. NZD/EUR has fallen to 0.5950, near the bottom of its range of the past two months.

US equities show signs of consolidation after the 6.5% surge last week. It has been a quiet day on Wall St with one trader describing conditions as “sleepy”. The S&P500 has been hovering in and out of positive territory and is currently down slightly.  Certainly, there has been no sign of a much-anticipated quarterly rebalancing flow into equities, with asset allocators supposedly looking to rebalance into equity markets after a quarter-to-date fall of 14% for the S&P500 so far. Perhaps they got in early last week, or inflows will be unleashed into the market in coming days.

NZ rates again showed some significant falls, playing catchup to global forces after the long weekend. The 2-year swap rate fell 10bps to 4.14% while 10-year swap fell 13bps to 4.13%, taking their cumulative fall since the mid-month peak in rates to 42bps and 46bps respectively. NZGB rates fell 8-10bps across the curve. As we’ve seen globally, paring of monetary policy tightening expectations have been a key driver of the move, with the peak OCR rate priced into the curve now some 50bps lower at 4.2% for Q3 next year.  Since the NZ close, Australian 10-year bond futures are up 9bps in yield terms, setting the scene for higher NZ rates on the open.

In the day ahead ECB President Lagarde speaks at the central Bank’s symposium and on the data calendar the key release will be the Conference Board measure of US consumer confidence, which so far has managed to hold up at a much higher level than the record low print for the University of Michigan measure. The balance of risk is for the series to converge, with the former falling steadily from here.