Little market reaction to UK election, US Fed rate hike all priced in, NZ swap-bond spreads streched, so narrowing is due

By Jason Wong

Bond market reaction to the UK election was modest, with UK’s 10-year rate down 3 bps and Germany’s 10-year rate up 1 bp.

The US 10-year rate continued to drift higher from its year-to-date low seen earlier in the week.

From the opening of Asia trading, the rate was up 5 bps to 2.23% at its peak, before meeting resistance and ending the NY session at 2.20%.  A swoon in technology stocks and a spike up in the VIX index from a 24-year low of 9.37 up to as high as 12 got the market’s attention. There was no real trigger for the move, and the S&P500 index ended fairly flat, but with a clear rotation away from tech stocks and towards the energy and financial sectors.

The key event risk this week is the FOMC announcement on Thursday morning with key retail sales and CPI data ahead of that. A Fed rate hike is nearly fully priced so the focus will turn to the economic and rate projections.  We see a good chance that the Fed’s rate projections over the next few years – which remain well above current market pricing – remain unchanged.

On Friday, NZ’s swap curve barely changed while NZ government rates saw increases of 2-3 bps across the curve.

Swap-bond yield spreads have looked stretched of late as government bonds have outperformed, so a narrowing gap has been well overdue.

It should be a quiet session today with Australia on holiday.

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