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Interest rates jump as bonds sold off; US jobs market slows; Greece pressure grows; Yellen warns; China services expand; UST 10yr yield 2.22%; oil up; NZ$1 = 75.1 US¢, TWI-5 = 78.1

Interest rates jump as bonds sold off; US jobs market slows; Greece pressure grows; Yellen warns; China services expand; UST 10yr yield 2.22%; oil up; NZ$1 = 75.1 US¢, TWI-5 = 78.1
7th May 15, 7:29am by David Chaston

Here's my summary of the key issues from overnight that affect New Zealand, with news of rising interest rates.

A worldwide selloff in government bonds deepened overnight with a rise in yields to their highest level this year, spreading unease across all asset classes and putting stock markets around the world under pressure.

New Zealand Government bonds saw +4 bps added to their yields yesterday and no doubt they will jump higher today now.

In local wholesale swap markets, we have seen yields jerk lower for short terms and higher for long terms. The 1-5 curve is suddenly back over 20 bps; the 2-10 curve now touching 50 bps. Remember, the 1-5 was completely flat just 15 days ago and the 2-10 at only 13 bps 30 days ago. The shift has been substantial and after the overnight international moves these curves are very likely to get even steeper.

The Greek standoff and a sense that the upcoming US non-farm payrolls report will be under whelming got the blame for the big bond market shifts. Janet Yellen also chimed in with warnings about the sustainability of high stock market prices.

The pre-cursor ADP Employment Report out overnight strongly hinted at weak US labour market data.

In Europe, a further hardening of attitudes toward Greece also surfaced overnight. It turns out the ECB has already spent US$120 bln supporting Greek banks and is very reluctant to keep doing that in a losing cause

In China, there are reports of a strong services sector in April balancing out the weakening manufacturing sector. But that services strength may be temporary; higher levels of Chinese consumer spending might be the result of spending recent gains from their sky-high stock markets - but these have fallen back recently.

In New York, the UST 10yr benchmark yield keeps on adding to its run of steady rises and is now at 2.22%.

The US oil price also rose and is now at US$61/barrel, while Brent crude was higher too at US$68/barrel in today's trading. But there is a growing sense that these prices are about to fall again.

The gold price however is unchanged at US$1,194/oz.

The New Zealand dollar starts today lower at 75.1 US¢, lower against the Aussie at 94.1 AU¢, and at 66.1 euro cents. The TWI-5 is down about 100 bps from where it was this time yesterday to 78.1.

If you want to catch up with all the local changes yesterday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here »

Daily exchange rates

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Source: RBNZ
Source: RBNZ
Source: RBNZ
Source: RBNZ
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Source: RBNZ
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Source: CoinDesk

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12 Comments

by  skudiv  |  7th May 15, 8:27am 1430944064

Another unknown political party has won a huge election victory, this time in Canada.
http://www.cbc.ca/news/elections/alberta-votes/alberta-election-2015-re…
I don't know a lot about the party, but it's another sign that the serfs are getting restless.

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by  sharetrader  |  7th May 15, 8:36am 1430944570

its a left leaning party so you are correct, the world is turning left as they see the huge gap being created by the haves and have nots

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by  skudiv  |  7th May 15, 11:21am 1430954472

The last time we had a shake-up of political parties, we ended up with Fascists in Italy, Nazis in Germany and war parties in the UK and US. Nations are arming up for war, just like WWII.

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by  @tony  |  7th May 15, 2:07pm 1430964436

Or the people that want to save the planet and those that think the planet is not worth saving as long as you money in the bank.

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by  Andrewj  |  7th May 15, 8:46am 1430945165
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by  Andrewj  |  7th May 15, 8:48am 1430945330

Mohamed El-Erian warns of trouble as bond liquidity dries up

LAS VEGAS (MarketWatch) — The leap in German bund yields over the last two weeks is another sign that liquidity issues could eventually present serious problems for financial markets, former Pimco Chief Executive Mohamed El-Erian on Wednesday warned at the annual SALT investment conference in Las Vegas.

“There isn’t the countercyclical risk-taking we need,” said El-Erian, chief economic adviser at Pimco parent Allianz ALV, +1.54% That could spell trouble when there is a big shift market positioning, he warned at SALT, a gathering of around 1,800 hedge-fund and investment-industry professionals.

That is because investors may not be able to reposition at a low cost. Bond liquidity is a “delusion, not an illusion,” he noted.

http://www.marketwatch.com/story/mohamed-el-erian-warns-of-trouble-as-b…

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by  Andrewj  |  7th May 15, 9:08am 1430946507

The German bund yield is soaring like a rocket today. After touching on the truly lunatic rate of 5bps only a few weeks back it has just crossed the 60bps marker. Needless to say, when a blue chip 10-year bond widely held on @95% repo leverage moves that far that fast—–there is some heavy duty furniture breakage happening in fast money land.

http://davidstockmanscontracorner.com/the-great-disconnect-central-bank…

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by  Stephen Hulme  |  7th May 15, 9:59am 1430949593

A graphic view of the culprit security is illuminating - the stated recent ~two week 5bps to 60bps yield range translates to a 5.10% capital loss. Those baying for official interest cuts need to account for the attached risks. The extremely high currency unit value of a basis point at such low yield levels is of primary importance.

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by  King of the whiners  |  7th May 15, 10:07am 1430950068

Bill Gross goes a little freaky about it:
https://www.janus.com/bill-gross-investment-outlook

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by  Stephen Hulme  |  7th May 15, 10:24am 1430951060

Yes he does - the pertinent point being - We are approaching that point now as bond yields, credit spreads and stock prices have brought financial wealth forward to the point of exhaustion

When NPVs for future security service flows are the same as the forward nominal liabilities there is little wriggle room for action that is less than perfect.

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by  Henry_Tull  |  7th May 15, 10:54am 1430952881

that point perhaps prompting activity closer to home

http://www.smh.com.au/business/banking-and-finance/nab-to-raise-55b-in-… (5.5 not 55)

National Australia Bank shares will raise around $5.5 billion in a rights issue and demerge its UK bank, Clydesdale. The capital raising will provide a capital buffer of 1 percentage point above the midpoint of its common equity tier 1 capital target to absorb potential regulatory changes.
Capital is in the spotlight in the wake of the financial system inquiry, which pointed to the importance that Australian banks look "unquestionably strong" to foreign investors who fund the gap between domestic deposits and lending. NAB has been under growing pressure to sell its UK banks.

maybe replace "look" with "told to" .... foreign investors who fund the gap between domestic deposits and lending.

NAB's capital raising follows Westpac Banking Corp's $2 billion equity raise via a partially underwritten dividend reinvestment plan, announced as the bank delivered flat profits on Monday. ANZ Banking Corp, meanwhile, said it would continue its dividend reinvestment plan, which should raise around $450 million during the period.......

safe as houses no less.. more so here.

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by  Stephen Hulme  |  7th May 15, 12:26pm 1430958376

It is becoming increasingly obvious, in addition to the calls for higher bank capital ratios to underwrite poor residential property lending practices, that there is a need to drastically drop LVR rates well below currently accepted rates (80%?) for second home buyers.

China's central bank cut the minimum down payment requirement for second home buyers to 40 percent. Read more

It also seems the RBA has got itself engulfed in a vicious circle of it's own making.

Australia’s 10-year yield climbed 26 basis points to 2.95 percent since the Reserve Bank cut interest rates to an unprecedented 2 percent and said the country needs a weaker currency. That sent the premium over similar Treasuries to 71 basis points, more than double the 14-year low reached in March.

“The blowout in the spread will be making the Reserve Bank’s job harder because it means that it becomes more attractive to park money in Australia,” said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd., which manages $124 billion. “At some point, the Reserve Bank will start to get concerned again and may intervene with the form of another rate cut or a return to an easing bias for the currency.” . Read more

Making it cheaper to fund term sovereign debt positions is hardly a recipe for stability - witness Germany's recent bond price dislocations (higher up the thread).

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