NZ 10-year bond yield down under 2.4%; swap curve rally not as strong as bonds; US treasuries in consolidation mode

By Jason Wong

US 10-year Treasuries range traded between 1.60-1.63% on Friday, closing flat at 1.62% on little newsflow. The market appeared to be in a consolidation mode following the earlier rally after the FOMC Statement.

Boston Fed President Rosengren – whose views are widely reported, being a recent dove turned hawk – released a Statement explaining his dissenting vote in favour of higher rates. He commented “…I am arguing for modest, gradual tightening now, out of concern that not doing so today will put the recovery’s duration and sustainability at greater risk, by generating the sorts of significant imbalances that historically have led to a recession. This view would echo those of many in the market.

In local trading on Friday we saw another strong rally in NZ bonds, with the 10-year rate down 8bps to 2.38%. The cumulative fall over just two trading days was a remarkable 22bps.

The strong rally reflects a number of factors, including the rally in global rates following the US FOMC announcement, a reversal of overseas investor flows, the slightly more dovish-than-expected RBNZ OCR review and the forthcoming lengthening of the duration of the NZ government stock index. Friday’s tender of $150m 2033 bonds saw strong demand, with over $800m of bids, with the next tender a distant month away.

NZ’s swap curve saw lower rates, but not to the same extent as the government curve. The 2-year rate fell by 1.5bps to 2.02% while the 10-year rate fell by 3.5bps to 2.51%. Expectations of easier monetary policy helped drive the 2-year rate lower, with the market pricing in a 74% chance of the 25bps cut in November, up from 68% at Thursday’s close and 56% immediately preceding Thursday’s OCR review.

Over the next 24 hours there’s not much on the economic calendar to excite the market. Focus turns to the first US head-to-head Presidential debate which takes place Tuesday afternoon NZ time.

Daily swap rates

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