US 10 year Treasuries have traded in a tight trading range of 1.70-1.72%, with little news to digest. The 1.70% mark has represented an area of key support since the start of the year, and there’s nothing much out this week to take rates down another leg.
Trading is likely to remain light ahead of the upcoming UK referendum and FOMC meetings. Fed Funds expectations have stabilised over the past couple of sessions, with little prospect seen for a tightening later this month or in July.
Germany’s 10-year government bond rate reached a fresh record low overnight of 0.035%, before closing at 0.05%. It feels inevitable that the rate will soon go negative, the same way as Japan and Switzerland have done. This helps contain US rates, with global bond investors keeping the Germany-US spread in check.
The ECB’s corporate debt buying programme began overnight. Remarkably, the average yield on euro-area investment grade debt has already fallen below the 1% mark, a record low, and corporates have been busy issuing debt, in anticipation of the purchases.
The local rates market saw higher rates yesterday, reversing the previous day’s declines. Manufacturing sales data were soft and, being the last partial indicator released that feeds into GDP, we firmed up our estimate for Q1 at 0.3% q/q. Such a weak result (negative growth in per capita terms), represents a payback from the more robust growth seen in the second half of last year. Our economists see better growth prospects for the current quarter and into the second half of this year, which matters more for financial markets.
The OIS market prices this morning’s RBNZ meeting at 2.19%, suggesting just 6 bps of easing priced in. The stronger housing market and boost to the CPI from higher oil prices give the RBNZ an excuse to keep rates unchanged, but the stronger NZD won’t be helping the Bank in its desire to get inflation back up to target. A full 25bp rate cut is priced in by early next year. The 2-year swap rate rose 5bps to 2.29%, possibly reflecting a squaring up of trader positions ahead of the announcement.