10-year German Bund futures contract broke through the 0.0% threshold into negative yield territory for the first time ever last night. Expectations lower elsewhere too

By Jason Wong

The NZ 2-year swap rate fell for the fifth consecutive day, down 2 bps to reach a fresh low of 2.40%.

This put downward pressure on the rest of the yield curve, on a day in which yields would normally have risen, based on the previous day’s US move.

The 5-year swap rate fell by 1.5bps to 2.65%, while 10-year swap was flat at 3.07%.

The driver of the interest rate falls was the first ANZ business outlook survey for the year, which showed weaker business confidence and activity indicators, and year-ahead NZ inflation expectations fell by 25 bps to 1.39%.

The market has been gaining confidence over recent weeks that the RBNZ will deliver further rate cuts this year, the question being one of timing.

The June meeting is priced at 2.23%, suggesting a full 25bp cut by then, and a small chance that 50 bps are actually delivered by that date.  We think that the market could price in up to 50 bps of rate cuts (even if not delivered) in coming weeks/months compared to the circa 39 bps of cuts current priced in by November. This could see the 2-year swap rate trade down toward its mid-2012 lows below 2.35%.

Overnight, the US 10-year rate has traded in a very tight 3 bps range and currently trades down 1bp at 1.75%.

Despite recent higher wage and CPI inflation data, there’s a real lack of conviction that the Fed will follow through with tighter monetary policy. Weaker than expected pending homes sales and Chicago PMI data supported that view, although these are volatile series on a month to month basis.

Lower global bond rates are keeping a lid on US rates for now.  Germany’s 10-year rate fell by 4 bps to 0.11%.  Traders noted that the active 10-year Bund futures contract broke through the 0.00% threshold into negative yield territory for the first time ever last night. US long term rates in the high 1s look like great value compared to zero to negative rates elsewhere.

Coming Up

All polled economists expect the RBA to keep its policy rate unchanged at 2.0%.  The policy tone is also expected to be similar to February, with the RBA maintaining a mild easing bias.  There are lots of international data releases to digest over the next 24 hours.  Key highlights are China’s PMIs and US ISM data.  NZ’s GDT dairy auction should be fairly neutral overall.  NZX dairy futures plunged ahead of the previous auction, but this was not reflected in the GDT auction, so the subsequent sharp rally in the futures shouldn’t be reflected in GDT pricing either.

Daily swap rates

<!–

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for(i=0;i

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