Bonds sold off globally. Good UK growth a trigger. German rates rise to 5 month high. Eyes on US Q3 GDP, with 'whisper' it could surprise stronger

By Jason Wong

A global bond market sell-off ensued at the beginning of European trading session, following the release of stronger UK GDP data.

The better data, defying predictions of a post-Brexit slump (for now, at least) are the death knell for any further BoE easing this year.  The UK 10-year rate rose by 10 bps to 1.25%, the highest level since the day of the referendum.

This fed through into higher German rates, with Germany’s 10-year rate rising 9 bps to 0.17%, a 5-month high.

This global bond sell-off theme carried through into the US treasuries market.  The US 10-year rate rose to as high as 1.87%, a level not seen since the end of May.  It currently sits up 5 bps for the day at 1.84%.  The yield curve steepened, with the 2-year rate up 1 bp to 0.88%.

The day ahead sees the release of US Q3 GDP data.  While the consensus sits at an annualised 2.5%, we’ve seen a number of estimates revised up by 0.5%, following yesterday’s trade data so the “whisper” number could well be closer to the 3% mark.  This represents an improvement in growth from the circa 1% average over the past few quarters.  A result in line with consensus would support the Fed tightening by 25 bps in December.  Some 20 bps has already been priced into the OIS curve at this point and some 40 bps by the end of 2017, the same as two weeks ago, so one can’t blame changing Fed expectations for the most recent bond market sell-off.

Higher global bond yields will feed into higher local rates today.  That will come on top of the rates sell-off yesterday, where we saw the 2-year swap rate up 2.5 bps to 2.145% and the 10-year rate up 6 bps to 2.78%.

NZ’s 10-year government bond yield (Apr 27) closed yesterday at 2.65%, its highest level since May and up 39 bps for the month to date.  Expect a fresh high today and a steepening of the curve.

Daily swap rates

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Jason Wong is on the BNZ Research team. All its research is available here.