Local rates move higher following global pressures. Eyes on Yellen testimony, RBA minutes

By Jason Wong

The shift in the UK referendum polls towards “Remain” has imparted an upward bias to global interest rates, given the risk-on sentiment. 

Germany’s 10-year government bond rate is back up to 0.05% and the UK rate is up to 1.24%, a 17 bps lift since Thursday’s low.

US rates are higher across the curve, with the 2-year Treasury rate up 4 bps to 0.73% and the 10-year rate up 6 bps to 1.67%, and 15 bps up from the 1.52% nadir reached on Thursday.  There has been no economic data to drive the market so much of the increase can be put down to the increase in risk appetite.

Fed Chair Yellen testifies on monetary policy to the Senate Banking Panel early tomorrow morning NZ time.  Normally this would be a key event for the market, but given the close proximity to last week’s FOMC meeting and press conference, this time around it is unlikely to be enlightening.  The Fed is reluctant to hike rates following the softening in employment indicators in an economy that is only showing modest growth. But the message will continue to be that the bias is for monetary policy to tighten, albeit proceeding cautiously.

Yesterday, the local rates markets saw higher yields across the board, a reflection of the global pressures.  There was a slight steepening of the yield curve, with 2-year swap up 1.5bps to 2.285% and 10-year swap up 4bps to 2.795%.  The further push up in global yields overnight is likely feed into local trading today.  Local influences on the interest rate curve will be limited this week and the UK referendum will remain the focus.

Today’s RBA minutes are not expected to be market moving.  They will elaborate on the Governor’s statement earlier this month.  Recall there was no clear easing bias portrayed and a more upbeat assessment of growth was expressed. Currently the market prices the RBA’s cash rate will be cut toward 1.45% in the year ahead, from 1.75% currently.  Our NAB colleagues’ central view is for an unchanged cash rate.

Daily swap rates

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