US treasury rates are higher across the curve.
The 2-year rate is up 2 bps to 1.355% and the 10-year rate is up 3 bps to 2.16%.
Despite higher rates since the FOMC announcement, the market remains unconvinced that the Fed will follow up with another hike in September. Even out to December the odds of another hike are just under 50/50 and less than 1½ hikes are priced in through to the end of next year.
By outlining the broad parameters of the balance sheet normalisation strategy, the Fed has an option to begin that process in September, if conditions seem appropriate.
We still think that the market under-prices the risk of further Fed tightening, but we do need to see some recovery in CPI data before the Fed is likely to move again.
The move lower in local rates yesterday reflected the significant move down in US treasury rates following the soft CPI data ahead of the FOMC meeting. NZ 10-year government bond rate fell by 7 bps to 2.72%.
Strong bidding interest in the tender of 2025 bonds was evident, with demand far exceeding supply.
The swaps curve was lower with the 2-year rate down 3 bps to 2.17% and the 10-year rate down 6 bps to 3.11%, both at fresh lows for the year. The 2-year rate is near the bottom of the 2.15-2.25% range we see prevailing over coming months.
The RBNZ OCR review next week is the next key event risk, but we see that passing without much fanfare. Expect some modest upside pressure to the curve today, following the offshore moves overnight.